Commodities hedge fund Westbeck scores double-digit gain, as “dizzying” oil surge set to continue

Middle East oil pumps

London-based commodities-focused hedge fund Westbeck Capital Management has seen its flagship strategy surge in recent weeks, as oil prices continue to trend upwards.

The Westbeck Energy Opportunity Fund finished February up 32.8 per cent, and is maintaining its positive momentum in March as oil prices regain pre-pandemic levels and oil equities rebound.

The strategy, which launched in 2016, trades oil markets using a long/short directional approach across equities, futures and options. Oil equities, oil futures – both long and short – oil options and emissions all contributed positively to March’s returns, which was the fund’s best monthly performance since April last year. By comparison, the XOP and Brent benchmarks rose 25.2 per cent and 17.5 per cent respectively.

The fund is now up 34.3 per cent in the first two months of the year, having gained more than 80 per cent in 2020.

The portfolio was positioned into February for a rising real rate event, to capitalise on predicted oil price increases that have previously been linked to real rates rises, Westbeck explained in an investor update on Wednesday.

The strategy - co-run by Westbeck co-founders Jean-Louis Le Mee, CIO, and Will Smith, CEO – is now resolutely bullish on oil prices as coronavirus vaccinations accelerate, which they believe will allow economies to re-open in the coming months, and push economic growth and a recovery in oil demand.

“Following another aggressive move by OPEC+ last week, and against an expected backdrop of strong economic re-acceleration in the coming months, we now believe our USD75-USD85 Brent target will likely be achieved in H1 21 while risks of an oil price spike in H2 21 are rising,” the update noted.

“It is now clear to us that OPEC+ is pursuing a tight oil market strategy and aiming for higher prices. Looking at the huge draws likely ahead of us in Q2/Q3/Q4, we believe they are likely to be successful and hence we bring our oil price target forward.”

Westbeck believes yields may keep repricing higher, with some fixed income traders predicting the US 10-year will exceed 2 per cent before Easter – which, in turn, could trigger more disorderly behaviour in US equity indices.

“For that reason, in spite of our bullishness for oil and oil equities, the fund aims to maintain a large macro hedge component,” the updated noted.

It added: “We believe that we are at the start of a multi-year bull cycle in commodities and particularly in oil. There is an increasing chance that record oil prices will be reached in the next three years in our view.

“While the rally in oil and oil equities has been dizzying since the end of October, and many investors felt they have missed it, we expect that there is much more to come.”