Oil ‘God’ Blames Weaker Outlook and Algos in His Goodbye LetterBy and
Andy Hall says 2018 oil price outlook has deteriorated
Sees algorithmic trading dominating market for some time
Andy Hall, the oil trader known to many as "God", said he decided to close his flagship hedge fund amid a deteriorating outlook for prices next year and the “frustrating” dominance of algorithmic traders.
A renowned oil bull who shot to fame after Citigroup Inc. revealed that he pocketed $100 million from a single year’s trading, Hall struck a bearish tone in a letter to investors dated Aug. 1, which was reviewed by Bloomberg News.
"The fact that OPEC has had to talk about further extending its production cuts is ultimately a sign of weakness, not of strength," he wrote in his letter. "The medium-term outlook for oil still looks challenging with, if anything, balances for 2018 having deteriorated in recent weeks."
Hall, one of the best-known commodity dealers of the last three decades, complained that it was nearly impossible to trade oil based on fundamental trends in supply and demand, which are now too uncertain. That leaves the market at the mercy of computer-based trading systems.
"Algorithmic trading systems have increasingly come to dominate” and the trajectory of prices is chaotic, he said. “Investing in oil under current market conditions using an approach based primarily on fundamentals has therefore become increasingly challenging. It seems quite likely this will continue to be the case for some time to come.”
Hall confirmed in his letter he’s shutting down his flagship Astenbeck Master Commodities Fund II Ltd. and plans to return cash to investors by Aug. 31. After losing almost 30 percent of the value of that fund in the first half of this year on bets that oil prices would rise, Hall warned that U.S. shale firms would continue to flood the market.
"With the WTI forward curve back above $50, shale operators will be able to profitably hedge incremental production for 2018, thus risking even looser balances next year," he said.
With a turn of irony, he told investors that his conversion from a secular, or long-term, bull into a bear could be a sign that now is the right time to buy oil.
"Having hitherto held a secularly constructive view of the oil market, we are aware that our shift in sentiment could itself be viewed as a contrarian signal," he wrote. "But, be that as it may, we should base decisions on rational analysis and that analysis leads us to conclude that, for now, at least, it has become hard to risk capital on the price of oil with as much conviction as in the past."
He told investors that he would not "tie up" their capital while waiting for better risk-reward opportunities, wishing them "good fortune in the future."
Astenbeck representatives didn’t respond immediately to emails and phone calls seeking comment. The Southport, Connecticut-based company managed $1.4 billion at the end of last year, according to a Securities and Exchange Commission filing, down from nearly $4 billion in 2011.
Hall’s career stretches back to the 1970s and includes stints at BP Plc and legendary trading house Phibro Energy Inc., once part of Citigroup. He was among the first to recognize the start of the bull cycle in the early 2000s that propelled oil from less than $20 a barrel to an all-time high of nearly $150.
There’s currently no consensus on a long-term price anchor due to the disruptive nature of U.S. shale oil, Hall said.
"Oil price bulls argue that the shale oil business model is a flawed one and is unsustainable, at least at current prices," he said. "Bears, on the other hand, say technology is allowing these companies to continuously drive costs lower as well as add to recoverable reserves."