Back in December 2014, when crude oil first crashed into a bear market and traders were desperately looking under nook and cranny for the first casualty of the commodity collapse, they found it in the face of oil trading "god", Andy Hall, best known for seeking $100 million in compensation in 2008 from Phibro's then-owner Citigroup, who would leave his long-term employer Phibro by the end of 2014 for the simple reason that after 113 years of operation, Phibro would liquidate in the US, having been unable to find a buyer (with rumors circulating that Hall's trading P&L did not exactly help the company's long or short-term prospects).
While Hall did sever his relationship with the liquidating Phibro (and may have accelerated its collapse with his bullish oil bets), he would keep running his own personal hedge fund, the $3 billion Astenbeck Capital, which may have been Hall's Phibro bearish oil "hedge" and emerged largely unscathed from the 2014 commodity rout because "Hall curtailed bets and shifted to holding cash."
However, 8 months later, with oil crashing again, and without Phibro to serve as a natural hedge, suddenly Andy Hall is in trouble. Again.
It appears that after the great collapse of 2014, the oil trading "god" refused to learn from his mistakes, and was convinced that oil would promptly rebound up to its historic levels. His bullishness was evident in his latest letter to investors (attached below) in which we found that both his long-term oil price outlook...
The U.S. shale oil resources which are profitable at $65 WTI simply are not large enough to offset the declining production in these other areas that will result from oil being at that level. At $65 WTI, the economically recoverable oil resource of the lower 48 states in the U.S. is about 70 billion barrels of oil. This would support production of between 9 and 9.5 million bpd – about today’s level. To grow production meaningfully would require prices closer to $80. (Interestingly though, prices much higher than $80 do not significantly increase the economically recoverable resource.)
In summary, global oil prices will not be capped by the average cost of producing U.S. shale oil. U.S. shale oil production costs lie along a spectrum and while the best producers can make adequate returns at $65 WTI many others cannot. Furthermore, in the longer term a significant proportion of non-U.S. shale oil production require prices higher than $65 WTI to sustain investment. Finally, U.S. shale oil producers cannot produce enough oil at $65 to offset the production decline that would occur elsewhere in the world over time at that price.
... as well as short-term...
The second half of the year will see a strong seasonal uptick in global oil demand. Oil demand in Q3 and Q4 of 2015 should be some 1.7 and 2.9 million bpd higher respectively than in Q2. Meanwhile year over year U.S. production growth has slowed and production is now starting to decline sequentially. It will continue to decline through the balance of the year (barring significantly higher prices). Non-OPEC production growth elsewhere in the world will also slow through the balance of 2015. By December of 2015 year over year non - OPEC production growth will be a negative 1.7 million bpd compared to a positive 2.7 million bpd in December of 2014.
With global oil consumption rising through the second half of the year at the same time as non-OPEC supply growth is stalling and with OPEC essentially at full capacity, the call on OPEC production will exceed their ability to meet it. This will result in falling global oil inventories during the balance of 2015 and in 2016.
Meanwhile, Saudi Arabia is fighting a proxy war with Iran in neighboring Yemen. It is also facing an existential threat from ISIS which is endeavoring to stir up sectarian unrest in the oil producing east of the country – home to most of Saudi Arabia’s large Shiite minority. Much of the rest of MENA is in turmoil. It’s not unreasonable to say that the geopolitical risks in the major oil exporting region have seldom been higher. Yet oil prices currently have little or no risk premium and are - furthermore - below the longer run marginal cost of production. Because of this and given that the underlying fundamentals continue to improve, price risks are skewed to the upside in our view.
... were quite bullish. They have also been, so far, dead wrong. And as Reuters reports, after two consecutive months of 3% losses in May and June at which point he was up just 2% for the year, July was by far the cruelest month in history for the oil trader, a month in which he suffered a whopping 17% loss. To wit:
Oil trader Andy Hall's hedge fund lost about 17 percent in July after failing to anticipate sliding crude prices as U.S. inventories piled up, a letter to its investors showed on Thursday.
The monthly loss was the second largest in the history of his Connecticut-based Astenbeck Capital Management firm, performance data accompanying the letter showed. The decline cut total assets under management at Astenbeck to about $2.8 billion, down about $500 million from June.
So after being up just barely up for the year in June and suddenly down 15% for 2015 a month later, having lost half a billion in just one month, it is a virtual certainty that the redemption requests are coming in. Worse, with Hall no longer having any hedges to cushion the ongoing oil crash (and in fact, it appears he is levered to the upside), his fund may be margin called to death soon enough even in the absence of major redemptions.
Which begs the questiton: will Hall no longer be seen as an oil trading "god" if Astenbeck is promptly shut down, and the "god" blows up twice in less than a year? Perhaps instead of "god", a more appropriate animalistic comparable is "pony" with an undiversified bag of tricks.
His June letter to investors is below.