TORONTO: Hedge funds are turning bullish on oil once again, betting the pandemic and investors’ environmental focus has severely damaged companies’ ability to ramp up production.
Such limitations on supply would push prices to multi-year highs and keep them there for two years or more, several hedge funds said.
The view is a reversal for hedge funds, which shorted the oil sector in the lead-up to global shutdowns, landing energy focused hedge funds gains of 26.8 per cent in 2020, according to data from eVestment. By virtue of their fast-moving strategies, hedge funds are quick to spot new trends.
Global oil benchmark Brent has jumped 59 per cent since early November when news of successful vaccines emerged, after Covid-19 travel curbs and lockdowns last year hammered fuel demand and collapsed oil prices. Last week it hit pre-pandemic levels close to $60 a barrel.
US crude has climbed 54 per cent to around $57 per barrel during the same period.
“By the summer, the vaccine should be widely provided and just in time for summer travel and I think things are going to go gangbusters,” said David D. Tawil, co-founder at New York-based event-driven hedge fund, Maglan Capital, and interim CEO of Centaurus Energy.
Tawil predicted prices of $70 to $80 a barrel for Brent by the end of 2021 and is investing long independent oil and gas producers.
Hedge funds’ bullish bets come despite the International Energy Agency warning in January a spike in new coronavirus cases will hamper oil demand this year, and a slow economic recovery would delay a full rebound in world energy demand to 2025.
Normally, oil producers would ramp up production as prices increase, but a move by environmentally focused investors from fossil fuels to renewables and caution by lenders leaves them hard-pressed to respond, hedge funds and other investors say.
The pace of output recovery in the United States, the world’s No. 1 oil producer, is forecast to be slow and will not top its 2019 record of 12.25 million barrels per day (bpd) until 2023.
Production in 2020 tumbled 6.4 per cent to 11.47 million bpd.
The Organization of the Petroleum Exporting Countries, which has also revised down demand growth, however, still expects output cuts to keep the market in deficit throughout 2021.
“We are going to see some incredible oil prices over the next couple of years, incredibly hot,” said Tawil.
Global crude and condensate production was down 8 per cent in December from February 2020, prior to the pandemic’s spread accelerating, according to Rystad Energy.
North America’s output was down 9.5 per cent and Europe’s production declined just 1 per cent over the same time period.
US sanctions against Venezuela and declining oilfields in Mexico have kept oil output from Latin America sluggish.
Some banks are forecasting the United States, which leads with the number of Covid-19 cases, to reach herd immunity by July, which would greatly stimulate oil demand, said Jean-Louis Le Mee, head of London-based hedge fund Westbeck Capital Management. — Reuters
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