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By Maiya Keidan and Rod Nickel
TORONTO, Feb 7 (Reuters) - Hedge funds are turning bullish
on oil once again, betting the pandemic and investors'
environmental focus has severely damaged companies' ability to
ramp up production.
Such limitations on supply would push prices to multi-year
highs and keep them there for two years or more, several hedge
funds said.
The view is a reversal for hedge funds, which shorted the
oil sector in the lead-up to global shutdowns, landing energy
focused hedge funds gains of 26.8% in 2020, according to data
from eVestment. By virtue of their fast-moving
strategies, hedge funds are quick to spot new trends.
Global oil benchmark Brent has jumped 59% since
early November when news of successful vaccines emerged, after
COVID-19 travel curbs and lockdowns last year hammered fuel
demand and collapsed oil prices. Last week it hit pre-pandemic
levels close to $60 a barrel.
U.S. crude has climbed 54% to around $57 per barrel
during the same period.
"By the summer, the vaccine should be widely provided and
just in time for summer travel and I think things are going to
go gangbusters," said David D. Tawil, co-founder at New
York-based event-driven hedge fund, Maglan Capital, and interim
CEO of Centaurus Energy.
Tawil predicted prices of $70 to $80 a barrel for Brent by
the end of 2021 and is investing long independent oil and gas
producers.
Hedge funds' bullish bets come despite the International
Energy Agency warning in January a spike in new coronavirus
cases will hamper oil demand this year, and a slow economic
recovery would delay a full rebound in world energy demand to
2025.
Normally, oil producers would ramp up production as prices
increase, but a move by environmentally focused investors from
fossil fuels to renewables and caution by lenders leaves them
hard-pressed to respond, hedge funds and other investors say.
The pace of output recovery in the United States, the
world's No. 1 oil producer, is forecast to be slow and will not
top its 2019 record of 12.25 million barrels per day (bpd) until
2023. Production in 2020 tumbled 6.4% to 11.47 million bpd.
The Organization of the Petroleum Exporting Countries, which
has also revised down demand growth, however, still expects
output cuts to keep the market in deficit throughout 2021.
"We are going to see some incredible oil prices over the
next couple of years, incredibly hot," said Tawil.
'BULL MARKET'
Global crude and condensate production was down 8% in
December from February 2020, prior to the pandemic's spread
accelerating, according to Rystad Energy.
North America's output was down 9.5% and Europe's production
declined just 1% over the same time period.
U.S. sanctions against Venezuela and declining oilfields in
Mexico have kept oil output from Latin America sluggish.
Some banks are forecasting the United States, which leads
with the number of COVID-19 cases, to reach herd immunity by
July, which would greatly stimulate oil demand, said Jean-Louis
Le Mee, head of London-based hedge fund Westbeck Capital
Management, which is long a mix of oil futures and equities.
"Oil companies, for the first time in a long time, are
likely to make a big comeback," he said. "We have all the
ingredients for an extraordinary bull market in oil for the next
few years."
In the United States, hedge funds increased their allocation
to Exxon Mobil Corp by 21,314 shares in the third
quarter, the most recent U.S. filings compiled by Symmetric.io
showed.
Hedge funds added another 9,070 shares of U.S. majors
ConocoPhillips and 4,144 to Chevron Corp over
the same time period.
Elsewhere, shorting activity in BP PLC fell by 16
million shares on Feb. 4 but increased slightly in European oil
major Royal Dutch Shell Plc by 1.9 million shares, data
from FIS’ Astec Analytics showed.
Some investors remain skeptical on Canadian oil companies,
among the world's most carbon-intensive producers, though they
are bouncing back faster from the pandemic than the United
States.
Current short positions rose in 10 out of 14 Canadian oil
companies in the Toronto energy index during the second two
weeks of January, according to filings reviewed by Reuters.
U.S. shale production will not quickly rebound, given the
capital required and debt producers are carrying, lending oil
prices support, said Rafi Tahmazian, senior portfolio manager at
Calgary-based Canoe Financial LP.
North America's oilfield services sector, which producers
rely on to drill new wells, has been decimated, he said.
"They're decapitated from being able to grow," Tahmazian
said. "The supply side is broken."
(Additional reporting by Nia Williams in Calgary
Editing by Denny Thomas and Marguerita Choy)
