The Bright Side of the Oil Market Downturn

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According to eVestment’s latest report, most energy-focused equity funds fell about 10.7% last year. This is not really a surprise, given how poorly the general energy market has been performing recently.
However, there were some funds that managed to use the downturn to their advantage.

For some perceptive hedge funds, this oil downturn has not been as catastrophic as it has been for competitors. Certain equity funds had the foresight to predict the oversupply of oil in the market, and could therefore profit from accompanying negative consequences, such as plummeting oil prices. In a very keen move, these companies had anticipated the drop in the oil price and had placed ‘shorts’ in order to benefit from such a drop. Bloomberg reports that Lansdowne Partners gained 14.8% in its long-short equity fund, which was mostly due to short positions.

Pierre Andurand, founder of Andurand Capital Management, anticipates that the oil price will drop to $25 in the first quarter of 2016. The price came very close to that recently, reaching a low of $26.55 before recovering a bit. The anticipation of further price drops will help to keep observant funds afloat, despite the volatility in both the energy market and the overall market.

This lowered price has not only been beneficial for shrewd hedge-funds, but it has also shown grace to refineries, which have been able to produce at a lower cost. However, some individuals are worried that the recent lifting of the export ban for US crude oil will limit the refineries’ access to cheap oil. But with oil expected to be oversupplied well through 2016, and with the recent lifting of sanctions from Iran, it is likely that oil will remain abundant and cheap.

Article written by HEI contributor Timothy Cole.

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