Renowned oil trader and hedge fund manager Pierre Andurand believes there’s a 70% chance that OPEC will reach an agreement to curtail oil output soon and as a result, oil prices will “slowly trend upward” towards $60 to $70 by the end of 2017. Andurand, who’s Andurand Capital Management oversees manages $1.4 billion in its main strategy made these comments in the Andurand Commodities Fund October investor update, a copy of which has been reviewed by ValueWalk. For the month of October, the fund lost 3%. Year-to-date the fund has produced a return of 7.8% for investors. The news was first reported by Bloomberg News.
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Pierre Andurand: 70% Chance Of OPEC Deal
Echoing comments by fellow oil trader and hedge fund manager Andy Hall, Andurand believes the oil market has already rebalanced any action by OPEC will only accelerate price growth on top of improving fundamentals.
Non-OPEC production is falling, demand is rising and Andurand predicts that the US oil industry will not be able to maintain the cost deflation trend seen over the last few years as prices tick higher and demand for service equipment increases, which “leads us to believe that at $60/bbl, US shale growth will not be able to bridge the supply gap created by the $450 billion of cumulative capex cuts over the past few years.”
On the topic of OPEC, Andurand writes:
“History has demonstrated that OPEC typically never reaches an agreement before the headlines. Unfortunately, the noise surrounding negotiations is often misinterpreted by the media and most analysts who perceive bargaining techniques as a sign of a deal falling apart.”
He goes on to explain that it is unlikely Saudi Arabia can continue to accommodate oil at less than $60 a barrel as the country is under significant financial stress and has been drawing heavily on foreign exchange reserves despite having cut some subsidies. At current price levels, their foreign reserves would be below adequacy requirements in approximately two years. The two wild cards are Iran and Iraq. Andurand writes “Iran will have to accept an output freeze under four mbd” but even if the country does not agree to this output cap the fund does not “expect their production to grow significantly over the next few years without incremental outside investments.” Iraq could also derail any potential deal as it is unlikely that the country actually produces the 4.8 million barrels per day it says it does. As OPEC will mostly focus on the month on month supply reduction rather than the actual output level, Iraq’s uncertain production figures will make it difficult for the country to stick to any output deal.
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If OPEC does go ahead and limit production across the cartel to 33 million barrels of oil per day, Andurand estimates a global inventory draw of 1.3 million barrels next year, powering prices towards $60bbl to $70bbl. If there’s no deal when OPEC meets at the end of this month, the fund is expecting a 0.3 million barrel global draw. If the cartel strikes a deal at the end of the month, a sharp rally in oil prices to $60bbl is expected by the end of the year.
This article was originally published in ValueWalk.
Photo: Tom Blackwell