Trader who called price slump sees OPEC deal boosting crude to $70

David Marino 12/9/2016

LONDON (Bloomberg) -- Hedge fund manager Pierre Andurand expects the combined output cut agreed to by OPEC and Russia will boost oil to $70/bbl in the first half of next year.

Andurand, who correctly called the slump to the mid-$20s in the first quarter of this year and the subsequent recovery, said the agreement will lead to large inventory declines sooner than anticipated, spurring higher prices. Andurand’s fund gained 6.1% in November and is up 14.4% so far this year, according to an investor letter.

The Organization of Petroleum Exporting Countries agreed on Nov. 30 to trim the group’s output by 1.2 MMbopd starting in January, the group’s first cut since 2008. In addition, non-OPEC Russia pledged to reduce production by as much as 300,000 bopd. Given where prices are, OPEC will probably need to renew the six-month deal, according to Andurand, the founder and chief investment officer of Andurand Capital Management.

The Saudis are concerned that there might be a supply deficit in the near future because of a lack of investment, which could lead to a "super spike in the next few years," he said earlier this week in an interview on Bloomberg Television.

"The cut from Russia is coming from Vladimir Putin," Andurand said. "The oil companies will obey, I am confident."

Oil has risen 12% in New York since Nov. 29, the day before the OPEC agreement. Some oil producers used the rise in prices as an opportunity to hedge their output.

"U.S. producers have been aggressively hedging their output over the last week," he said in the letter. “We do not understand why they are so eager to hedge their revenues when they cannot hedge their costs.”

At $60, U.S. production may grow by 400,000 bpd to 500,000 bpd, while an increase to $85 oil may add 800,000 bpd to 1 MMbpd, according to Andurand. Most participants are overestimating non-OPEC production outside the U.S., not realizing how fast output from fields around the world is declining.

OPEC and Russia "realized that enough investment got cut in the industry as a whole and that if prices do not go back up fast enough the world will face $100/bbl oil in the coming years," Andurand said in the letter. "This is a major turning point."

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