Legendary oil trader expects crude prices to rebound

Just two months ago, fears of plunging Iranian supply had the oil market and analysts wondering how high prices could go and if we are about to see $100 oil again.

Just a few weeks later, no one’s talking about $100 anymore, and oil analysts and traders are trying to guesstimate if oil prices will rebound from the current lows, after the sell-off in recent weeks wiped out this year’s gains.

Many analysts see room for recovery, factoring in expectations that OPEC will announce a sizeable cut in early December to lift Brent Crude prices out of the low $60s into the $70s.

One of the analysts expecting an OPEC-assisted rebound in prices is legendary oil trader Andy Hall, who was nicknamed ‘God’ for profitably predicting oil prices.

“The balance of risk at this point favors some sort of recovery,” Hall said in a recent interview with Bloomberg. “It’s quite likely OPEC will come through with some sort of cut in the next month or two,” said Hall.

Citing data from geospatial analytics company Orbital Insight, Hall told Bloomberg that over the past few months, oil inventories have jumped in OPEC countries, Europe, and North America.

On the demand side, stronger US dollar against emerging-market currencies and concerns over the US-China trade war have been weighing on demand, according to Hall.

Andy Hall, the legendary oil trader who had bet on higher oil prices for more than a decade, continued to hold his bullish view even after the 2014 oil price crash. But in the summer of 2017, he closed his main fund Astenbeck after the fund posted double-digit losses.

“In short, OPEC, the market and oil bulls have run out of runway,” Hall said in a letter to investors seen by the Financial Times in July 2017.

Hall now sees prices recovering and OPEC taking a decision at its December 6-7 meeting to cut oil production again to prevent another glut and lift the price of oil.

Both OPEC and the International Energy Agency (IEA) have recently said that oil inventories around the world have been rising lately. However, the two organizations have different views on what growing stockpiles mean. The IEA sees the inventory build “as a form of insurance, rather than a threat.” OPEC, for its part, is already discussing cuts to prop up prices, after having boosted production to offset what it expected to be a significant Iranian supply plunge. The drop-off hasn’t materialized yet—at least not as steep as feared—also thanks to US waivers to eight key customers of Iran’s oil.

Analysts have started to widely expect OPEC to announce a cut of at least 1 million bpd in December, and anything less could disappoint and sink oil prices further.

However, over the past week, analyst views have become more clouded due to the complicated US-Saudi Arabia ties. Riyadh may be disappointed that it may have been ‘duped’ by the US into pumping more to offset Iranian losses. But the US Administration this week refused to blame the Saudis for the killing of Jamal Khashoggi, and President Trump thanked Saudi Arabia  for the low oil prices and urged for even lower prices.

“It’s impossible now to do fundamental analysis with any form of certainty because of what’s going on with the US Administration and their relationship with Saudi Arabia,” Amrita Sen, chief oil analyst at Energy Aspects, told Bloomberg on Wednesday.

Based on fundamentals, OPEC is absolutely pushing for a big cut—they know what they need to take off to balance the market, and it’s about 1.4 million bpd, said Sen. However, Energy Aspects’ chief oil analyst noted that no one on earth can know whether Saudi Crown Prince Mohammed bin Salman won’t just tell Energy Minister Khalid al-Falih, “No, you can’t cut”.

A ‘no-cuts’ OPEC meeting may fulfill President Trump’s wish for further declines in oil prices, and by extension, lower gasoline prices, but WTI Crude in the low $50s or below is dangerously close to the breakevens in some US shale plays that have been booming with the higher oil prices. Such is the Bakken in North Dakota, where oil production continues to hit new record highs this year, beating the previous record from late 2014.

“At current prices, Bakken producers in North Dakota are at real risk,” Sen told Bloomberg, adding that even in areas of the Permian, production growth “will absolutely slow” if the current WTI prices persist. 

Oil prices have room to rise if OPEC manages to bring a still hesitant Russia on board and announces a sizeable cut in two weeks. However, geopolitics could trump fundamentals again and depress prices further downward.

This article was originally published on Oilprice.com