Hedge fund manager Pierre Andurand said he expects crude oil prices to reach $60/bbl over the next three months and $70 next year as Saudi Arabia agrees to cut production and helps rebalance the market.
Saudi Arabia recognizes “a prolonged period of low prices is endangering longer term supplies,” Andurand, who foresaw oil’s plunge in 2014, said in an investor note. With reduced supply, the kingdom hopes oil prices will rise sooner, thus avoiding a future supply shortfall amid current global cuts in capital spending, he wrote.
“By forcing the market into a quicker rebalancing and pushing oil prices higher, they hope to avoid a large supply gap down the road,” Andurand said.
Oil prices have jumped above $50/bbl after the Organization of Petroleum Exporting Countries met in Algiers in September and agreed to cut oil production to a range of 32.5 MMbopd to 33 MMbopd.
“The Saudis want higher oil prices now and they will accommodate to make that happen,” Andurand wrote.
This week, Russia said it is willing to participate in OPEC’s decision to cap oil supplies. Andurand predicts non-OPEC crude supply, outside of the U.S., will decline by 600,000 bpd in 2016 and by 300,000 in 2017. Within OPEC, Libya could be a “bearish wildcard” if it were to increase output significantly.
The founder of London-based Andurand Capital Management, which manages $1.4 billion, also said lower crude prices have hurt Saudi Arabia’s economy. He said, “the removal of subsidies and tax increases have been widely unpopular” and that “$65/bbl would be needed to stop drawing on foreign exchange reserves.”
If prices top $60, U.S. production could grow by up to 200,000 bpd, he said. However, prices would need to be higher for a prolonged period before shale producers would ramp up activity.
Andurand’s fund gained 2.6% in September, and is up 11.1% so far this year, the letter showed. Hedge funds gained 0.2% last month and 2.9% for the year, according to data compiled by Bloomberg. Rob White, a spokesman for Andurand Capital, declined to comment on the investor letter.