Hedge funds bet on oil's 'big comeback' after pandemic hobbles producers
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[February 08, 2021] By
Maiya Keidan and Rod Nickel
TORONTO (Reuters) - 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% 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% 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.
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U.S. crude has climbed 54% 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% 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.
'BULL MARKET'
Global crude and condensate production was down 8% in December from
February 2020, prior to the pandemic's spread accelerating, according to
Rystad Energy.
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A combination of file photos shows the logos of five of the largest
publicly traded oil companies; BP, Chevron, Exxon Mobil, Royal Dutch
Shell, and Total. REUTERS/File Photo
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North America's output was down 9.5% and Europe's production declined just 1%
over the same time period.
U.S. 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, which is long a mix of oil futures and equities.
"Oil companies, for the first time in a long time, are likely to make a big
comeback," he said. "We have all the ingredients for an extraordinary bull
market in oil for the next few years."
In the United States, hedge funds increased their allocation to Exxon Mobil Corp
by 21,314 shares in the third quarter, the most recent U.S. filings compiled by
Symmetric.io showed.
Hedge funds added another 9,070 shares of U.S. majors ConocoPhillips and 4,144
to Chevron Corp over the same time period.
Elsewhere, shorting activity in BP PLC fell by 16 million shares on Feb. 4 but
increased slightly in European oil major Royal Dutch Shell Plc by 1.9 million
shares, data from FIS’ Astec Analytics showed.
Some investors remain skeptical on Canadian oil companies, among the world's
most carbon-intensive producers, though they are bouncing back faster from the
pandemic than the United States.
Current short positions rose in 10 out of 14 Canadian oil companies in the
Toronto energy index during the second two weeks of January, according to
filings reviewed by Reuters.
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U.S. shale production will not quickly rebound, given the capital required and
debt producers are carrying, lending oil prices support, said Rafi Tahmazian,
senior portfolio manager at Calgary-based Canoe Financial LP.
North America's oilfield services sector, which producers rely on to drill new
wells, has been decimated, he said.
"They're decapitated from being able to grow," Tahmazian said. "The supply side
is broken."
(Additional reporting by Nia Williams in Calgary; Editing by Denny Thomas and
Marguerita Choy)
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