Oil trading whiz Andrew Hall, who has stumbled in recent years, finally caught a break in February, posting his biggest monthly gain in more than three years.
Hall’s Astenbeck Commodities Fund II and its offshore companion rose 7.66 percent in February after losing money in four of the previous five months, according to the latest performance report sent to clients and obtained by Alpha. The last time Hall did as well in one month was in December 2010, when his funds surged 9.69 percent.
The February profit more than offsets the previous month’s loss, enabling the fund to post a 5.44 percent gain for the first two months of the year. As of March 1, Hall’s Westport, Connecticut–based Astenbeck Capital Management had about $3.6 billion under management, including $2 billion in the fund.
In his monthly reports Hall likes to point out how much he has outperformed his benchmark. From the January 2008 inception through February 28, 2014, the fund has returned 45.23 percent, compared with a 33.51 percent loss for the S&P GSCI index (formerly called the Goldman Sachs Commodity Index).
However, this is little solace for investors who did not hand Hall money at the outset. He has lost money in two of the past three years, dropping 8.31 percent in 2013 and 3.83 percent in 2011. The two losing years sandwiched an anemic 3.41 percent gain in 2012.
Hall’s performance at Astenbeck has been closely followed because of his stature in the oil trading markets. He made his name as an energy trader at Westport, Connecticut–based Phibro, a commodities trading firm that he joined in 1982 as an oil trader when it was a Salomon Brothers subsidiary. There he regularly produced outsize returns — enough to earn a bonus in 2009 rumored to be $100 million. That bonus came under fire because Citigroup, which then owned Phibro, had received bailout money from the U.S. government that same year. Citi sold the Phibro business to Occidental Petroleum Corp., sidestepping a potential PR disaster. Today, Occidental Petroleum owns 20 percent of Astenbeck, and Hall owns the other 80 percent.
Hall, who is bullish on oil, has been very frustrated by crude’s failure to surge in price. In an eight-page letter dated December 2 and obtained by Alpha, Hall was especially cynical of the view that there is growing oversupply of oil in the world, promising: “Ultimately fundamentals do determine prices. As Warren Buffett likes to say, in the short term the market is a voting machine, in the longer term it is a weighing machine.” He explains the implication is that prices reflect participants’ opinions today, but over time they will reflect fundamentals.
Drawing on that voting analogy, Hall insists that the markets are either badly informed or “presented with facts of questionable veracity.” In a detailed 28-page commentary — typical for Hall — dated March 3, he continues to lament that pundits and journalists “relentlessly make the case for lower prices” by insisting that demand is stagnating while supply is growing strongly. The result: Prices are 30 percent lower than the average spot prices observed during the past three years, Hall concedes.
But he then goes on to refute the bear case, laying out detailed evidence to support his claim that demand is not stagnating. “Global oil consumption has grown at slightly under 1.5 per cent per annum for the past 30 odd years and looks set to continue growing at or above that rate through the balance of the decade,” Hall asserts. He says the last time this occurred was in 2005 and that the situation continued through mid-2008, when it was short-circuited by the so-called Great Recession.
“Because supply could not keep pace with the growth in demand, prices increased fourfold before collapsing during the recession,” Hall explains. “Within a year however average annual prices had fully recovered and growth in global oil consumption corrected to its long run trend rate. That’s pretty remarkable.”
Hall also reaffirms his case that demand from emerging markets will rise faster than most people realize. Meanwhile, he says that growth in oil consumption surged in the U.S. during the latter part of 2013 as the economy accelerated.
At the same time, Hall points out that the U.S. accounts for essentially all the net growth in the world’s supply of hydrocarbon liquids. He then explains in detail why oil shale in the U.S. will produce much less oil than many people think. “Supply growth actually fell short of demand growth in 2013 with the result that commercial oil inventories in the OECD (Organisation for Economic Co-operation and Development) countries fell to their lowest level since 1999,” he writes.
He claims that one Wall Street analyst last week remarked that without shale, crude oil would be trading at $150. That is roughly 50 percent above current crude prices, which are hovering a little above $100.
As for his other investment plays, in his February commentary Hall tells clients that in 2014, platinum and palladium will see demand outstrip supply for the third consecutive year “as demand continues to be driven by strong auto sales and strengthening industrial demand.”
In a report sent to investors in early March, Hall tells clients he covered his small short position in gold and closed out “essentially all of our equity positions.” But it is Hall’s bet on oil prices rising that will make or break his reputation — and fund performance.
