With crude climbing to levels not seen since 2014, commodity funds have recovered the client outflows they suffered last year. And if firms such as Westbeck Capital Management and Commodities World Capital are correct about prices soon exceeding $80/bbl from about $68 currently, then the jump in allocations may just the beginning.
Until Friday, everything seemed to point to oil extending its gains, with confidence in the global economy building and geopolitical tensions and production shortages showing no signs of going away. Then U.S. President Donald Trump slammed OPEC on Twitter, saying prices are artificially high and will not be accepted. Prices slipped 19 cents/bbl.
Still, these funds are “desirable in times of expected market volatility” and will probably continue to see inflows in 2018, said Peter Laurelli, global head of research at data provider eVestment.
Investors allocated $3 billion to commodity-focused hedge funds from January through March, the most since the third quarter of 2016, according to eVestment. Last year they pulled $680 million from the strategy in the first net outflows since 2014.
Here’s a summary of Westbeck and Commodities World Capital’s oil forecasts and returns before Trump’s comments:Westbeck’s energy fund recovered earlier losses from this year — including a double-digit decline in February — and is now up 11% through April 19, according to Chief Operating Officer Jari Habib. The fund lost 17% in 2017. The firm sees WTI crude climbing to more than $85/bbl in the second half Commodities World Capital is about flat this year through April 19 after recovering losses that saw it drop 4.4% in the first quarter. It predicts oil will hit the mid-$80 area by the second half, though Chief Investment Officer Luke Sadrian said it’s better to “trade around the volatility whilst maintaining a core bullish view” than to simply buy and hold.
West Texas Intermediate crude climbed in January, only to plunge 13% in about two weeks -- leading to particularly sharp losses by some bullish hedge funds in February. Now it’s on the rise again and is more than double the price reached in early 2016 when concerns about a world economic slowdown were at their worst.
“As the direction of oil is very hard to predict, it’s difficult for managers in this sector to deliver consistent performance,’’ said Michael Gerber, head of research at investment adviser Fundana SA’s fund of funds.
Trump’s threat to pull out of the Iran nuclear deal -- which allows the Mideast country to sell more oil in exchange for curbs to its nuclear program -- had been pushing prices up. And Saudi Arabia, the world’s biggest exporter, wants to push prices to $80/bbl to help pay for the government’s policy agenda.
Declining output in Venezuela and falling global inventories are also playing their part, as are the worsening tensions in Syria, which threaten to disrupt supply from across the region.
The “crunch year” for strong oil prices will actually be 2019, though, when the effects of five years of under-investment in new oil projects around the world have their full impact, Westbeck CEO Jean-Louis Le Mee wrote in his firm’s February investor letter, seen by Bloomberg News.