London-based oil-focused hedge fund Westbeck Capital’s flagship energy strategy suffered its biggest loss this year in last month’s violent market sell-off, shedding 15.2 per cent as its long oil equity positions were sent into a tailspin.
Though September’s loss was the strategy’s third monthly slide in a row, the Westbeck Energy Opportunity Fund remains up 41.7 per cent year-to-date.
The fund, which is managed by Westbeck co-founders Will Smith, CEO, and Jean-Louis Le Mee, CIO, remains upbeat on the commodity, pointing to a “constructive story” in fundamentals and data.
“As the fund hit its -15 per cent drawdown limit towards the end of September, we aggressively reduced risk in line with our drawdown plan and used our five-day cooldown period to reassess the fundamentals of the oil markets and the soundness of our positions,” the firm said in an update this week.
It added: “Unlike in February when a similar exercise led to moving our portfolio from net long to net short, we remain constructive.”
The “violent sell off” in energy equities last month ties in with broader developments that have strengthened what Westbeck calls the “negative narrative” engulfing oil equities.
These include: the Covid-19 resurgence which have led to European lockdowns; the return of Libyan barrels, BP’s warning that 2019 may have been the peak for global oil demand; China’s net carbon neutral target by 2060, and Joe Biden’s “likely victory” potentially leading to the ‘imminent return of Iran’.
Looking ahead, though, the fund – which takes a long/short directional approach to trading oil equities, futures and options – is eyeing an acceleration of oil rebalancing, with almost half the peak inventory overhang “now wiped out” after only five months.
It also sees Asian oil demand coming “back with a bang”, and physical markets strengthening.
“Positioning is very bearish and we believe a lot of CTA buy triggers are nearby,” Westbeck said in the commentary. “The market is set up for a significant short squeeze into year-end in our view.”
It added: “Looking at 2021, China planning to double its net import coverage through SPR buying, the huge wave of consolidation we are currently seeing in the shale patch and the proximity of a vaccine all reinforce our conviction for the start of a multi-year bull market.”
