Energy hedge fund Westbeck’s momentum halted, as rising Covid cases send oil equities into retreat

Oil pipeline

Energy-focused hedge fund manager Westbeck Capital Management’s flagship strategy has suffered its first monthly loss in eight months, after surging coronavirus rates in China, Europe and North America dented oil markets – but the fund remains up more than 70 per cent since the start of the year.

The Westbeck Energy Opportunity Fund – a long/short directional hedge fund strategy which trades a mix of oil equities, futures and options – fell 5.3 per cent in July. By comparison, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks oil services companies, lost 14.4 per cent in July, while and Brent (total return) gained 2.1 per cent.

The USD230 million manager – which is led by co-founders Jean-Louis Le Mee, CIO, and Will Smith, CEO and deputy CIO – has profited from a resolutely bullish stance on oil for much of this year. The Energy Opportunity Fund is up 70.8 per cent year-to-date, as prices rebounded towards the mid-USD70s earlier this summer on the back of the anticipated reopening of global economies.

But July proved “one of the biggest dislocations on record", they said, noting a “sharp pull-back” in energy equities against positive performances in crude oil and natural gas prices.

The strategy remains down so far in August, Westbeck managers said this week, with crude oil prices having now fallen some 10 per cent, which also knocked oil equities: the XOP tumbled 24 per cent and the VanEck Vectors Oil Services ETF (OIH) fell 30 per cent from recent highs.

Now, the firm has “reduced risk further with our drawdown limit in mind” but ultimately remains constructive on the fundamental oil market outlook.

“While Covid demand losses in Asia are now in line with the potential loss we were estimating last month (~1m barrels a day), we believe these losses are likely to be short-lived and have been partly offset by upside demand surprises in Europe & India and disappointing supply,” Westbeck wrote in a strategy update.

They said the Delta variant wave has had a bigger impact on market psychology and price action than expected, with Covid news flow “worse than anticipated”, noting rising hospitalisation rates in the US and evidence in Israel suggesting the need for booster shots.

“But for all these negative developments, the Covid demand hit to oil demand is still essentially on par with our estimate last month,” the London-based manager observed.

“We maintain that this summer sell-off is at odds with strong fundamentals and could be a big buying opportunity. Brent prices moving to the USD80s is still in the cards before year-end, in our view.”

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Hugh Leask
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