NEW YORK (Reuters) – Andy Hall, one of the oil market’s biggest bulls, has confessed to being surprised by last month’s widening price gap between the U.S. and London crude benchmarks that pushed his $4 billion hedge fund further into the red, a letter to investors showed.
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Hall’s Westport, Connecticut-based fund Astenbeck Capital Management fund, like many investors, got the price differentials between the two oils wrong, after refinery maintenance caused an unexpected surge in U.S. crude inventories in November, sent U.S. crude prices lower.
Returns data obtained by Reuters showed Hall’s Astenbeck Master Commodities Fund II lost nearly 4 percent in November, finishing down for a third straight month and on course for an annual loss of more than 8 percent.
Unless it turns around, it would be the fund’s second yearly loss since its inception in 2008. The fund lost almost 4 percent in 2011.
Astenbeck did not respond to an email seeking comment.
The spread between the U.S. West Texas Intermediate (WTI) crude and European North Sea Brent forms one of the most popular bets on the oil market.
The difference between the two oils has swung wildly this year, with Brent’s premium to WTI as high as $23 a barrel in February before falling to nearly zero in July.
It was the doubling of that premium to more than $19 in a matter of weeks by November 27 that confounded Hall and other major energy funds. It was around $14 on Friday.
“The recent blow out in the Brent/WTI spread …. caught many – including ourselves – by surprise,” Hall told investors in his December 2 letter, seen by Reuters on Friday.
Industry sources said other hedge funds that got the spread wrong recently include Frere Hall Capital Management, which posted about 20 percent in losses in October, and Andurand Capital Management, which fell more than 6 percent last month. Both are London-based funds.
Andurand and Frere Hall did not respond to emails seeking comment on their performance.
Hall said November’s blowout in the spread was caused by low volumes of oil processed by U.S. refiners that caused supplies to swell in Cushing, Oklahoma — the delivery hub for U.S. crude. WTI fell around 10 percent for October through November as U.S. inventories spiked.
But since December began, WTI has gained more than 5 percent, in line with Hall’s comment that he expected the U.S. market to outperform relative to Brent “although it may be a bumpy ride”. Brent has gained less than 2 percent this month.
“On average, and over time, WTI ought to trade at a $6-8 discount to Brent, which means at current levels WTI prices have already discounted the worst,” Hall said.
“We also continue to believe that forward WTI prices in the mid to low $80 range are too low, and continue to afford significant upside even though producer hedging programs will be a headwind.”
For Brent itself, Hall saw “significant but limited downside risk” in 2014.
“Whilst $100 (support) could be tested, it would be difficult for Brent to trade below $100 on a sustained basis.”
(Editing by Josephine Mason and Bob Burgdorfer)