“Pandora’s box has opened”: Oil hedge funds target price shocks after Engine No. 1’s ExxonMobil triumph

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The recent spate of victories by sustainability-focused shareholder activists against oil giants could spark renewed price volatility, heralding outsized opportunities for hedge funds betting on energy markets.

Engine No. 1, a hitherto little-known US activist hedge fund, recently hit the headlines after it managed to secure three members on the board of ExxonMobil as part of its push for clean energy reforms at the US oil giant.

That shock win came as Royal Dutch Shell was ordered to slash its global carbon emissions by 45 per cent by 2030  in a landmark ruling by court in the Hague. At the same time, Chevron shareholders voted by almost two-thirds in favour of a plan to cut emissions generated by its products.

“Pandora’s box has been opened,” says Jean-Louis Le Mee, co-founder and CIO of London-based energy-focused hedge fund Westbeck Capital Management. “ESG pressure on the majors will only intensify.”

Le Mee, who oversees Westbeck’s flagship long/short directional Energy Opportunity Fund, believes that such increasingly strident shareholder activism will pile further pressure onto major oil producers. That could herald further oil price spikes, in turn potentially destabilising the global economy.

“If that happens, we might see a pushback against activism later down the line. For now, it will only increase,” Le Mee tells Hedgeweek. “It is increasingly clear that all the majors are going to have to let their oil production decline and in short order.”

For commodities-focused hedge funds, the ongoing ESG drive is adding to an already bullish supply outlook, potentially boosting those managers betting on certain oil-related stocks and energy prices.

The Westbeck Energy Opportunity Fund - which invests long and short across a range of oil equities, futures and options - gained around 46 per cent in the first four months of 2021, taking profits from see-saw price movements during Q1. Its investment strategy is positioned around further energy price hikes in the coming period, against a backdrop of further supply squeezes and reopening economies post-Covid.

“Record oil prices in the next three-to-four years are graduating from possible to probable. Clearly the majors will suffer economically from this switch, although higher oil prices will be a big offset,” Le Mee observes.  “But E&Ps and back-end oil prices are the big beneficiaries. And that’s where we are positioning our risk.”

He adds: “Nobody seems to be doing any maths on the oil supply gap ahead of us. But maybe much higher oil prices are required and even wished for by climate activists to encourage and quicken the switch to electric vehicles and renewables.”

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Hugh Leask
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