How does a renowned oil trader who bets on rising prices make money when crude plunges 18 percent in a month? By betting on the U.S. dollar at the same time.
Andrew J. Hall, revered for anticipating major swings in the market, posted a 1 percent gain in his commodity hedge fund in November, according to people familiar with the matter. Hall, who is leaving his longtime post as chief executive officer of Phibro LLC, the century-old commodities trading house now owned by Occidental Petroleum Corp. (OXY), sees oil falling further as he focuses on his private fund.
“It’s a new era,” said Carl Larry, a former trader who is now a Houston-based director of oil and natural gas at Frost & Sullivan. “So many things have changed. This will be a chance for him to step back, assess the market, and maybe plot a comeback.”
The surprise rise at 64-year-old Hall’s Astenbeck Capital Management was driven by his bets on the greenback and a move to sell out of crude contracts before the worst of the rapid decline in prices, according to the people and his letters to investors in the $3 billion fund. A prolific art collector and Oxford University graduate, Hall is revered as a “god” by rival traders, according to “Oil,” a 2010 book by Tom Bower.
Known for his conviction that oil prices will rise in the long term and that U.S. shale drilling is overhyped, Hall still sees reasons for an oil rally – eventually. First he sees crude prices falling further to as low as $50 a barrel before recovering in the first half of next year, according to his Dec. 1 letter to investors.
Astenbeck, which posted losses in 2011 and 2013, is poised to finish the year up by as much as 7 percent, according to the people who asked not to be identified because the information isn’t public.
The fate of Occidental’s Phibro has yet to be determined, with Hall’s departure making the future more uncertain. The oil company had already told employees this year that it planned to sell or close its energy trading unit by the end of 2014.
Phibro’s U.S. employees haven’t been active in trading for months and the overseas operations may be sold, the people said. Occidental announced plans in February 2014 to reduce exposure to proprietary trading, Melissa Schoeb, a company spokeswoman, said yesterday.
As CEO, Hall gained notoriety during the 2009 financial crisis for a nine-digit pay package while Phibro was owned by Citigroup Inc., igniting controversy over compensation at banks that had been kept afloat with federal funds.
The former trader for BP Plc anticipated oil’s rise to a record in 2008, and its subsequent fall, helping him land compensation near $100 million for three straight years. Before Phibro was bought by Occidental, it had been profitable every fiscal year since 1997 and in 80 percent of the quarters during that period. The trading house’s gains for those years amounted to $4.4 billion, according to data compiled by Bloomberg.
Saudi Arabia was correct not to cut production after last month’s meeting of the Organization of Petroleum Exporting Countries, Hall wrote to his investors on Dec. 1. The market is oversupplied, making any effort to sustain prices at $90 a barrel “a fool’s errand,” he said.
Too much has been invested in boosting output in recent years, particularly in U.S. shale formations where producers have drilled wells with cheap, borrowed money, he said. Hall has frequently said the oil boom is over-hyped and won’t last as long as the industry thinks. Low prices will run weaker shale operators out of business and lead to reduced spending on more costly developments such as those in Canada’s oil sands, deep-water drilling and Arctic projects, Hall said.
“As the oil industry and, more to the point, its investors and its lenders slam on the brakes and as low prices stimulate demand growth, the current glut will in time disappear — if not turn into a future shortage,” he wrote in his letter. “That at least is what the Saudis are counting on, and to us it appears a reasonable bet.”
Hall’s strategy in the past has often been to buy so-called long-dated oil contracts for delivery years into the future. He likes to invest when those futures are cheaper than current prices, because he believes oil will rise. Earlier this year, the futures contracts were selling for less than oil prices at the time.
In February, a futures contract for a barrel of December 2019 West Texas Intermediate benchmark crude was selling for $76 a barrel while current prices averaged $100. By July, those 2019 contracts were selling for $88. That represents a 16 percent gain. Astenbeck, which also invests in numerous other commodities, including precious metals, was up 19 percent through June, according to his investor letters.
In August and September, Hall told investors he’d cut risk and sold a number of oil contracts at the higher price, and planned to wait for the market to once again turn his way. Now, such futures contracts are selling above today’s closing WTI price of $63.80, an environment in which Hall in the past has held off investing, according to people familiar with his positions.
When prices fell, Hall invested in the dollar. Astenbeck’s 1 percent gain in November came as U.S. oil prices fell to the lowest level in five years. In that same period, the Bloomberg Dollar Spot Index, a gauge of the dollar’s strength against 10 major trading partners, rose 15 percent.
Hall’s departure from Phibro, where traders have cut their teeth for more than 40 years, and the potential for the unit’s closure rippled through trading circles yesterday, said Eric Rosenfeldt, a vice president at Virginia Beach, Virgina-based energy supply firm PAPCO Inc.
Among the most storied trading houses in history, Phibro helped create modern oil-trading markets, with more than 2,000 employees around the world at one time. In 1981, the firm was large enough to buy the investment bank Salomon Brothers. Founded in 1901 as Philipp Brothers trading metals and chemicals, Phibro dove into oil in 1973 when the Arab oil embargo caused prices to soar and left U.S. refineries searching for supplies.
Phibro’s original crude traders included Marc Rich, who would later gain infamy for breaking sanctions against Iran and fleeing the country to avoid federal indictments. Rich won a controversial pardon from President Bill Clinton. Thomas O’Malley, now the chairman of PBF Energy Inc., hired Hall for Phibro at a salary of $135,000, he told reporters last month.
“You expect to see some trading shops come and go in energy trading, but there are some staple firms like Phibro that have been around such a long time, and created so many good professionals throughout the industry,” Rosenfeldt said by phone. If its doors eventually close, “it would certainly be the end of a very long era.”