A look at what will happen next in the world economies
Friday, January 2, 2015
Oil-Glut Move Spurs Further Losses
So much for peak oil, huh. Aivars Lode
Crude Hits a Three-Year Low in Wake of Lower Saudi Prices; Bearish Hedge Funds Find a Winner
By Christian Berthelsen, Rob Copeland, and Nicole Friedman
Oil prices plunged to new lows Tuesday on renewed concerns about a global supply glut, extending a selloff that has rattled financial markets, driven down shares of energy companies and stoked alarm among government officials.
Saudi Arabia’s surprise price cut for its U.S. oil deliveries this week has driven the latest swoon, with U.S. oil prices down 4% since the announcement. The move suggests the world’s largest oil exporter is more concerned with maintaining production volume and market share than shoring up prices through output cuts, experts say.
Some nimble investors are making money off the steep slide. Hedge-fund managers including Pierre Andurand and the team of George “Beau” Taylor and Trevor Woods are among those who have reaped profits by correctly predicting rising global crude-oil output would overwhelm the market and send prices lower. They placed bets, known as shorts, that prices in the futures market would fall and were guided by research that closely tracked the flow of physical oil from wells and pipelines to storage tanks and refineries, according to people familiar with their trading strategies.
These oil bears were early in coming around to the view that prices north of $100 a barrel couldn’t be supported by tepid global-demand growth when production was accelerating in Libya, Iraq and the U.S. Few oil-market strategists and traders predicted that oil prices, now down 28% from a June peak, would fall at such a rapid pace at a time of steady, if slow, global growth.
Many traders say Saudi Arabia’s action to protect its market share means the Organization of the Petroleum Exporting Countries, a group that controls about 40% of global oil output, is unlikely to take steps to curtail production at its Nov. 27 meeting in Vienna.
“Prices are going to be under downward pressure in almost any scenario,” said Lawrence Goldstein, a director of the Energy Policy Research Foundation, which receives funding from the oil industry.
Many oil-producing countries both inside and outside OPEC rely on oil-related revenues to fill their coffers, and the sharp selloff is sparking worries about budget shortfalls and financial instability. Saudi Arabian Oil Minister Ali al-Naimi is making a rare trip this week to Venezuela and on Wednesday is set to meet privately with Venezuelan Foreign Minister Rafael Ramírez, the country’s former oil czar, diplomats said.
In the U.S., the implications of lower oil prices are mixed. Cheaper crude is a boon for the U.S. economy, with drivers saving about $250 million a day on gasoline compared with in early summer, according to AAA. This leaves consumers with money to spend on other items just as the holiday shopping season starts. The national average retail gasoline price is $2.97 a gallon, the lowest since December 2010.
On the flip side, the latest decline in oil prices spilled over into stocks for a second day in a row, weighing on shares of oil companies and helping drag the S&P 500 into negative territory for the day Tuesday.
As a whole, hedge funds and other investors are still bullish on oil prices, based on the latest data from the U.S. Commodity Futures Trading Commission, which doesn’t cover oil’s latest leg down. But they have cut those bullish bets on U.S. oil prices by 34% since mid-June, according to the CFTC.
Oil markets have bounced back from steep selloffs in the past, meaning recent gains reaped from falling oil prices could reverse quickly.
Still, some big-name fund managers are joining the bearish camp. Paul Singer , founder of Elliott Management Corp., which oversees $25 billion, expects oil prices to fall for several years thanks to strong U.S. supply, according to an investor letter.
Among the biggest beneficiaries of oil’s decline have been specialized and relatively small hedge funds focused on sophisticated energy bets. Few have been as bearish as Taylor Woods Capital Management LLC, the $932 million hedge-fund firm run by Messrs. Taylor and Woods and backed by Blackstone Group LP. As crude plunged, Taylor Woods’s fund soared 8% in October, erasing its annual loss. It is now up about 5% for the year, according to people familiar with the results.
Late in 2013, Taylor Woods bet on a decline in prices in the oil-futures contract for December 2014 delivery on the New York Mercantile Exchange. December 2014 crude is currently the near-term contract, which ended Tuesday at its lowest price since October 2011. Around the time the firm placed the trade, the price was in the low $90s, according to people with knowledge of the trade.
Now, many traders are watching a quirk in the futures market that appeared on the heels of the Saudi announcement. The Nymex oil price for December delivery dropped below that for January delivery on Monday, a sign some investors see as a harbinger of even lower prices to come. The last time this happened was in January.
Andurand Capital Management LLP bet against both Nymex and Brent futures in early October, when it became clear to him that Saudi Arabia was unlikely to cut output. Mr. Andurand’s $300 million fund was up 6% in October, bringing 2014 gains to 5% through Monday.
“I try not to be limited by any long-term view,” Mr. Andurand said. “The market has changed.”
Anuraag Shah, a veteran of the powerhouse Louis Dreyfus Commodities Group, started betting on lower oil prices this past spring via his nearly $100 million Tusker Capital LLC hedge fund, and he was temporarily burned as prices marched higher.
“When we first started talking about it in May, no one wanted to hear about it,” he said. He added shorts of oil-company stocks, a risky bet that could have compounded his wins, or losses. Tusker gained more than 20% last month and is now up about 15% this year.
Though crude is rapidly approaching Mr. Shah’s original target of $75 a barrel, he expects the price to drop well into 2015.
— Kejal Vyas and Alexandra Scaggs contributed to this article.