Friday, July 7, 2017

Oil--Is Astenbeck Capital's Andrew Hall The Victim of Fake News?


He did it to himself.
Yesterday the Financial Timess' man-about-commodities, Neil Hume tipped us to Mr. Hall's letter to his investors in the story by the FT's petroleum poobah, David Sheppard:
We didn't relay Hall's sentiment because we couldn't figure out his motivation in the double and triple-thinking wilderness of mirrors that is high-stakes oil trading. My sharp-as-an-eight-year-old question was "What's he up to?"

The FT story is worth the read.

Additionally, we declined to post the July 5 Bloomberg story "Bear Market for Oil Caused by 'Fake News,' Says Raymond James" although we did have a pre-written piece headlined "This May Be The Dumbest Thing You'll Read On Oil". Our dubiosity was triggered by stuff like this from the RJ analyst:
“The recent collapse in oil prices was triggered by a breakdown in the technical charts but fueled by the ‘negative feedback loop’ of bearish headlines that usually follow price declines”  
Funds like Astenback buy satellite time so they can look at tank farms to see how high the covers are riding:

Not because it's valuable information, it's not anymore—what with all the financialization and hydrocarbon hidey-holes—but because they can. And because they may, just may, be able to spot an anomaly a few minutes before the other guy's satellite comes by. That's a tank farm in China. I don't know what message it is sending except for the fact that at the time the pic was snapped the Chinese had room to add to their inventory.

For a while the favorite bit of insight was Burlington Northern tank cars coming out of the Bakken:

That's the Bakken Oil Express. It's only the fourth largest such loading facility in North Dakota.
Make sure you don't count the same car twice. Seven hundred barrels per.

Don't get me wrong, we like Raymond James; Jeff Saut is an equity research legend. But the oil team....

WTI $$44.19 down $1.33.

Anyway, today ZeroHedge combined the two stories, Andrew Hall and Raymond James:

Is 'Oil God' Andy Hall The Latest Victim Of "Fake News"?

Raymond James' J. Marshall Adkins invoked one of President Trump's favorite phrases to explain oil's plunge, and to excuse his bullish bias (that crude can rise to as much as $65 a barrel).

As Bloomberg notes, conventional wisdom holds that resilient U.S. shale drilling, underwhelming progress towards OPEC’s goal in slimming global oil inventories, and output recoveries from nations exempt from the deal to curb production helped push crude down more than 20 percent from recent peaks. But according to Adkins - a noted oil bull - the bad times for oil can be chalked up to “fake news” that amplified the downside.
“The recent collapse in oil prices was triggered by a breakdown in the technical charts but fueled by the ‘negative feedback loop’ of bearish headlines that usually follow price declines,” the analysts wrote in a July 3 note to investors.

“Some oil price headlines have been misleading, or outright wrong, and they have distracted investors from what we believe is fundamentally a bullish overall picture.”
Concerns have been overblown, the Raymond James analysts argued, saying trends pertaining to U.S. inventories, production and gasoline demand have been misinterpreted. They put out a list of “myths” that explain the downturn and set out to debunk them in arguing that crude can rise about 45 percent from current levels.

The analysts neglect to bring up one of their own old calls: that West Texas Intermediate would touch $80 per barrel this year.
“While increasingly lonely in our bullish oil price view, we are still convinced that oil prices are on track to set cyclical highs over the next six to 12 months, and we encourage our readers to stay focused on the real fundamentals and not get caught up in the day-to-day torrent of noise,” the analysts conclude.
So with all that said, it appears that uber oil guru and perma-bull Andy Hall of Astenbeck Capital has "fallen" for this "fake news" as he has finally changed his mind on the general direction of oil prices.

Since the beginning of 2015, when oil prices first started to slide, Hall’s belief that the decline is only temporary has been unwavering, and as other oil bulls have thrown in the towel, Hall has continued to try to justify his bullish stance.

However, as ValueWalk's Rupert Hargreaves notes, it now looks as if Hall has become the latest oil bull to capitulate. In a July 3rd letter to investors of Hall’s oil-focused hedge fund, Astenbeck Capital, a copy of which has been reviewed by ValueWalk, the fund manager strikes a downbeat note and seems to finally admit that OPEC is no longer in control of the market and shale’s dominance now means $50 oil is the new normal.

Hall starts his letter by acknowledging that oil fundamentals have only deteriorated over the past six months as “demand growth seems to be somewhat less than anticipated while supply keeps surprising to the upside.” Meanwhile, “the expected acceleration in inventory drawdowns has not materialized – at least as evidenced by available high-frequency data.”

There are two main driving forces behind these fundamental changes, one long-term, the other short-term.

The long-term factor is “it is becoming increasingly evident that, under most reasonable scenarios, U.S. shale oil will be the marginal source of supply, at least until 2020” Hall writes. The most significant contributor to this is that the “cost of this oil is significantly lower than was believed to be the case even a few months ago,” and as a result “the long-term price anchor for oil has moved lower.” According to Hall’s letter, the price anchor has now fallen to $50 a barrel, down from $60 at the start of the year. Specifically, Hall writes:
“Technological advances have continued to drive down well breakevens as well as expand the shale oil resource base in the U.S. In a recent report, PIRA estimated that there are now 80 billion barrels, or half of the recoverable U.S. shale oil resource base, that is economic at $50 Brent (say $48 WTI) or less. This represents some 215,000 well locations. Each of these on average can produce around 300 bpd in its first year on stream. The current horizontal oil rig count is 650 and has been growing at a rate that would bring the count to close to 800 by the end of the year. 800 rigs can drill about 15,000 wells per annum which means potentially 4.5 million bpd of gross new production.
A recent Goldman Sachs analysis posits continued productivity growth for years ahead. This will be driven by higher rates of recovery of initial oil in place through the application of artificial intelligence and big data analytics. Goldman argues that this could eventually reduce breakevens to $45 and below. The best operators in the Permian like EOG already have well breakevens at, or even below, $40 WTI. As the rest of the pack catches up with the leaders, average breakevens are likely to fall further if Goldman is correct.”
The second, short-term factor is an apparent deterioration in the supply and demand balances for 2017. While many analysts were expecting OPEC’s actions to curb supply to reduce the inventory overhang, the expected supply deficit has not materialized. Hall writes that based demand in 2017 should be growing by around 1.7 million bpd, if not more. Actual growth, however, “seems to be closer to 1.4 to 1.5 million bpd for reasons that are not yet clear.” As demand comes in lower than expected, supply is building faster than expected with growth in non-OPEC supply revised progressively higher by 0.3 million bpd and OPEC additional supply increasing by 0.2 million bpd.
“Together,” Hall reports “these changes amount to a 0.9 million bpd deterioration in the supply and demand balance for 2017 and an initially expected supply shortfall for the year of 1.4 million bpd now looks like it will be closer to 0.5 million bpd.”
These figures are before shale contributions. “At the rate at which oil drilling rigs have been added in the U.S., non-OPEC production has been on a path to grow by as much as 2 million bpd in 2018....


Previously on the Astenbeck channel:

Oil Trader Andy Hall Nipped By $676,250 Art Forgery
We have had some success betting against Mr. Hall for the last few years but are aware that one of these days he's going to be right. Not just yet though....

...Hall is a pretty big deal in the collecting world, even putting on a semi-annual show at Oxford's Ashmolean Museum. 

Not As Good as Advertised: Losses For Former Oil Guru Andy Hall Deepen
In trading it is crucial to retain agility of mind and enough self-awareness to understand you are dealing with forces greater than yourself, puny human.
When you start screaming into the wind that the market is wrong, you've lost. The market is what it is....

Nov. 5 2015
Oil--Astenbeck Capital's Andrew Hall Says Production Data Doesn’t Suggest Surplus
We have had some success betting against Mr. Hall for the last few years but are aware that one of these days he's going to be right. Not just yet though.Front month futures $45.76, down 56 cents....
There's that self awareness. And some situational awareness.
Oct. 13 
Oil: Astenbeck Capital's Andy Hall Is Long, Wrong and Down 20% Year-to-Date
Aug 10
Despite Losing 17% In July, Astenbeck Capital 's Andy Hall Maintains Higher Oil Prices Are Right Around The Corner
Feb. 9
Astenbeck Capital's Andrew Hall: Oil Is Going To $65 And The Surviving Shale Plays Will Do Just Fine
Feb. 6
UPDATED--Astenbeck Capital's Andrew Hall "See's $40 Oil ‘Absolute Price Floor’"
Oct. 12
Former Oil Guru Andrew Hall Is In Cash 
Sept. 2014 
Oil: Former Phibro Guru Andy Hall Bets Against Shale, Buys Long-dated Futures
$100 Million Oil Trader Andy Hall: Maybe He Wasn't As Good As Advertised
How Some of the Biggest Funds in Oil Trading Got Wrong-footed By the Widening Brent-WTI Spread
Phibro Superstar Andrew Hall’s Commodity Hedge Fund, Austenback Down 10% YTD
The Last Word On Oil Trader Andy Hall and Life On the Right Hand Side of the Distribution
Occidental buys Citi firm Phibro for $250 million (OXY)