Commodities hedge fund Westbeck thrives during “extraordinary” oil price moves
The dramatic price movements in oil markets will continue to throw up trading opportunities, according to Westbeck Capital Management’s CIO Will Smith, whose commodities-focused strategy has notched up double-digit gains during the sustained volatility.
Smith told Hedgeweek that the “extraordinary” events of recent days - which saw West Texas Intermediate futures prices dip into negative territory for the first time ever – have unnerved markets and carry “far reaching implications” for commodities markets.
Westbeck’s Energy Opportunity fund is up 17 per cent so far in April, having advanced some 20 per cent during March. The London-based long/short specialist strategy has been positioned “short the front end, long the back” and has also traded a basket of producing E&Ps which Smith believes are “certain” to survive any price shock. At the same time, the fund has cut its gross exposures sharply as volatility remains elevated.
“It is important to remember that oil demand is not going away after this pandemic, and we strongly believe that those producing companies with long life assets are going to be amongst the best performers in equity markets generally, on the other side, as the oil price rallies strongly,” observed Smith, a former head of natural resources at CQS, Sir Michael Hintze’s long-running multi-strategy hedge fund.
Futures contracts on WTI, the US benchmark, collapsed into negative territory at -USD37 at one point earlier this week, while Brent crude dropped to below USD20. Further weakness in WTI is likely as storage continues to fill in the US, but Smith suggested Brent is a different situation, owing to it being seaborne crude.
“Undoubtedly such extreme volatility is throwing up many opportunities, and we’ll continue to trade accordingly. The market is being quite indiscriminate right now, for instance treating well hedged companies, like WPX, the same as the underhedged peers,” Smith said of the current trading environment.
“We expect May to be the critical month for “tank tops” in US storage, and we are also watching closely any easing of lockdowns, in the US and elsewhere.”
He said the implications of Monday’s price moves are potentially “far reaching”.
“The CME could yet force the USO to liquidate its massive length before next month’s roll if prices go negative. The Exchange does not want to be responsible for any loss, and it might be challenging, to say the least, to ask USO investors - who thought they were buying an “equity” - to top up.”
Looking ahead, Smith said it is clear that given the lockdown on the global economy, oil is currently oversupplied, and size of the demand collapse means that no cuts from OPEC+ and the US will change that in the short term.
“However, as demand returns, the damage done to production caused by the collapse in US shales, shut-ins elsewhere, and the ongoing underinvestment in new supply will cause prices to rally sharply,” he said.
On natural gas, he added: “Natural gas is still a more localised market but prices hit multi-year lows last month both in Europe and the US. The bulls are calling for higher prices however as a result of lower associated gas production from reduced oil production.”
He noted that spring typically is a strong time for wind and solar renewables production, especially in Northern Europe, and this has led to weakness in the European gas price.