Oil trader warns Opec not to raise output too fast
Pierre Andurand points to low spare capacity to deal with unexpected supply outages
Hedge fund manager Pierre Andurand, one of the most storied oil traders of his generation, has a simple message for Opec and Russia as they meet in Vienna to discuss raising output: do not shoot all your bullets just yet.
The oil specialist, who has returned investors in his eponymous $1.2bn fund 135 per cent net of fees in the past five years, warned the cartel that trying to cap the oil price rally too aggressively right now would leave it short of capacity in the future.
“Maybe Opec can cap the upside for oil in the short term but it would be incredibly dangerous for them to shoot all their bullets now,” Mr Andurand said in an interview with the Financial Times at his offices in London’s Knightsbridge last week.
“There is very limited spare capacity in the market so I think they will be careful about how much they raise, otherwise they risk creating problems in the future if their additional supply is easily absorbed.”
The France-born trader, who spent time with Goldman Sachs and Vitol, the world’s largest independent oil dealer, before entering the hedge fund world a decade ago, has been consulted by Opec members before about the outlook for crude.
He has been bullish for some time on the prospects for oil, forecasting an eventual return to $100 a barrel last August when many in the industry were still predicting that the post-2014 downturn would be longer and deeper than previous slumps due to US shale production.
Crude has risen to its highest level in four years, reaching $80 a barrel last month, heaping pressure on Opec and its de facto leader Saudi Arabia — not least from the Twitter account of US president Donald Trump — to do more to cool the price when it holds a meeting with Russia in Vienna this week.
But Mr Andurand’s view is that the oil rally has not just been stoked by planned supply cuts by major producers, which started early last year.
Demand has risen fast, inventories are down, and companies have slashed investment in future supplies. Production problems in Venezuela and Libya and renewed US sanctions on Iran’s exports are adding to a sense of tightness in the market.
“The fundamentals of markets can be very slow to turn,” Mr Andurand said. “We’re heading into a supply deficit now and just as the market was previously in surplus for three to four years I’d expect it to remain largely in deficit for a similar amount of time.”
It is for this reason he thinks Opec and Russia are likely to tread cautiously when they meet over Friday and Saturday, with delegates and ministers already gathering in the Austrian capital.
So-called spare capacity available to deal with unexpected supply outages is at its lowest in years, with Saudi Arabia the only country sitting on more than a few thousand barrels a day of additional production in a 100m b/d market.
Russia has talked of collectively raising output by 1.5m b/d but it is seen as unlikely this will gain acceptance within Opec and there are questions over where the barrels would come from.
“I think it is more likely that we see of 500,000 barrels a day increase or if more it will be staged over time,” Mr Andurand said.
He cautioned any announced increase might not result in any additional barrels reaching the market on a net basis, with further output declines predicted in Venezuela and Iran.
“If Opec and Russia raise output too fast now there could be little spare capacity left as demand keeps rising. This is a recipe for explosive price action to the upside,” he said.
Mr Andurand’s view was echoed on Wednesday by Scott Sheffield, the chairman of Pioneer Natural Resources, one of the largest US shale operators. He said that while he did not oppose an output increase by Opec to cool prices temporarily it would leave the market very vulnerable.
“At that point in time spare capacity will be zero or close to it,” Mr Sheffield said in Vienna, warning that this could boost prices in the event of further “geopolitical events”. He added that the US shale industry’s growth was heading for a slowdown from late summer that he predicted would last about 12 months until they could add additional pipeline capacity to get the oil more easily to market.
Mr Andurand said he is keeping his core bet on rising prices, despite them having pulled back since Saudi Arabia and Russia first started discussing output increases.
“Looking at the supply demand balances I don’t see how this works without prices rising to curb demand. We saw almost $150 a barrel 10 years ago. There’s little reason why we can’t go there again,” he said.