Westbeck Capital Management, the London-based long/short energy specialist hedge fund, is positioning for a continued recovery in oil and oil equities after making bumper returns amid frenzied markets during the first six months of the year.
The Westbeck Energy Opportunity Fund has generated a remarkable 76 per cent year to date, having gained more than 11 per cent in the first few weeks of June, which followed a 5.6 per cent return in May.
Westbeck CEO Jean-Louis Le Mee said the fund’s long position at the back of the curve in oil markets drove its May gains, while recent June returns stemmed from short front-end and long back-end bets.
The fund has also made money in equities in recent weeks, via long trades in international and Canadian domestic exploration and production (E&P) stocks, and short bets against certain US shale names.
Outlining how Westbeck is approaching the unfolding market landscape up ahead, Le Mee said the firm is staying “little bit cautious” in the very short-term, “but buying dips.”
“We believe oil and oil equities will continue to recover in H2 2020, but that path will be volatile – opening up more trading opportunities,” Le Mee told Hedgeweek.
“Chinese crude buying is fading, the flattening of the curve is forcing offshore inventories to move onshore, US and Canadian production shut-ins are starting to come back, Libya could bring some volumes back, and refining margins are atrocious.”
He said the potential for further demand improvement – with shale declines and OPEC+ action to draw inventories throughout the second half of 2020 – could ultimately help Brent crude prices recover to between USD50 and USD55.
Looking at 2021 and beyond, Le Mee described Westbeck’s outlook as “very constructive”.
“We are going to lose of a lot of supply. Some of the shut-ins won’t come back. US shale is in big trouble. And the USD1 trillion of under-investment in long cycle projects since 2014 is going to start haunting the markets – given the six-year lag and the time required to build a large project – and will be very sticky.”
Elsewhere, he predicted that OPEC is likely to regain control of oil prices, leading potentially to a USD80-USD85 price environment “at the minimum”, where the Saudis balance their budget.
“The risk is to the upside if we have a period of strong demand growth, just as in 2010, or once pandemic is under control, or if inflation flows start moving into the oil markets. We can easily see a return to USD100 plus.”
Le Mee observed how oil markets have had a history of “overshooting beyond fundamentals”, which he believes bodes well on the way up in 2021 and 2022.
Earlier this year, futures prices in the West Texas Intermediate benchmark slipped into negative territory for the first time in their history.
Le Mee said the negative price fall was ultimately created by the fear – rather than the reality – of “tank tops” in the US, which in turn forced most financial players to roll early ahead of the expiration in April.
“Liquidity disappeared which led to one large financial player – rumored to be the Chinese oil ETF – which did not have the storage capacity to be stuck and push prices to ridiculous levels,” he added.
“The real trading opportunity was understanding that all the oil ETFs, which cannot handle negative prices, would be forced the next day to roll or liquidate their length at the front of the curve.”