Oil correction bets pay off for energy hedge fund Westbeck

Oil pipeline

Energy-focused hedge fund Westbeck Capital has bagged its sixth consecutive monthly gain, as it “aggressively” tapped into buying opportunities during last month’s steep oil correction. 

The Westbeck Energy Opportunity Fund – Westbeck’s flagship long/short directional hedge fund strategy which trades across equities, futures and options – scored a 3.9 per cent gain in April, and has already started May positively, the firm said on Wednesday. 

The strategy – whose returns have surged more than 46 per cent in the first four months of 2021 - capitalised on buying opportunities in the aftermath of the seismic oil sell-off back in March and April, which the firm saw as a “healthy correction”. 

“The decision to re-increase risk during the correction/consolidation phase we described last month is paying off,” the firm wrote in a fund update this week. By comparison, the XOP tumbled 1.4 per cent in April, while Brent Total Return rose 7.4 per cent. 

Earlier, both front crude and XOP had “violently corrected” to the tune of some 15 per cent towards the end of March, which was followed by three weeks of volatile sideways consolidation. 

“We used that correction to aggressively re-increase our risk, with a focus on oil equities that severely underperformed oil in April,” Westbeck explained. 

Meanwhile, a crude oil rebound – which has seen front Brent re-testing USD70 earlier this month – came despite weakening timespreads and large oil demand losses in India and Japan. 

Looking ahead, the London-based manager now believes that despite an “increasingly likely” increase in Iranian barrels during the summer, that pick-up is largely priced in by investors. 

With the market forecasting an “impressive reacceleration” of demand over the summer, the predicted rise of some 5.2 million barrels a day over the next six months would dwarf previous demand rebounds seen over similar timeframes, Westbeck noted. 

“There is now a strong case in our view for a continued rise in oil prices as demand increases through the summer, and we believe Brent could hit the USD80s.” 

The firm – led by co-founders Jean-Louis Le Mee, CIO, and Will Smith, CEO and deputy CIO – also sounded a note of caution on macro developments. 

As European economies reopen, higher global yields – which have been kept low by central bank bond-buying – could reprice higher, proving a headwind for certain risk assets, they explained.  

“For that reason, just as in Q1, we have re-introduced a macro hedge to the portfolio – essentially short US equity indices,” they added. “Just as in Q1, rising yields might be a problem for high valuation equities but less so for oil and oil equities.”