8/10/2017 Andurand hedge fund’s $100 oil bet stands out from the herd

Oil
Andurand hedge fund’s $100 oil bet stands out from the herd
Bullish call rests on view that shale boom alone will not satisfy higher demand

Pierre Andurand, founder of Andurand Capital, who has made a big call on the oil industry © FT montage; Getty Images

2 HOURS AGO by: David Sheppard, Energy Markets Editor

Hedge fund manager Pierre Andurand’s bet that oil will return to $100 a barrel has caught the
attention of an industry more accustomed to energy executives warning they must prepare their
companies to survive with prices less than half that level.

It is a call that pitches the French-born trader against some of the biggest trends that have come
to dominate the oil market outlook, from the US shale oil revolution to the rise of electric cars,
which have led the majority of investors to believe oil prices will be capped near $50 for the
foreseeable future.

So far this year, Mr Andurand is nursing losses, with his fund having dropped 15 per cent. But
his record of bold bets paying off — Andurand has returned investors in his eponymous $1.1bn
fund a cumulative 560 per cent since 2008 — means it could be foolish to dismiss outright his
call of $100 oil by 2020.

The oil industry, after all, has always moved in cycles. So while there may be structural shifts
afoot in energy markets, will it really turn out to be any different this time? While few others are
prepared to make such a bullish call Mr Andurand is not alone in starting to argue that
predictions of “lower for longer (and longer)” may be getting a little overcooked.

“In 2014, after four years at being around $110 a barrel, most analysts were saying we’d never
see prices go back below $100,” says Mr Andurand. “Now everyone is arguing we’re never going
https://www.ft.com/content/2bcb2dfc-7d14-11e7-9108-edda0bcbc928 1/3
8/10/2017 Andurand hedge fund’s $100 oil bet stands out from the herd

back there, but I don’t really buy that the cost of production has gone down structurally or that
electric cars will have a big enough impact on demand.”

More than anything else his view is based on the

assumption that the impact of the US shale
Will [shale] be
industry, while important, is in danger of
profitable one day?
overshadowing every other source of oil supply.
Only if prices go up
significantly The rapid rebound in US shale production this year
PIERRE ANDURAND — the US Energy Information Administration sees
crude output growing by 500,000 barrels a day this
year and 560,000b/d in 2018 — has so far
contributed to capping prices, despite Opec leading oil producers in cutting 1.8mb/d from the
market.

But that forecast US crude supply growth is only equal to roughly a third of global oil demand
growth over the same two-year period, according to the EIA, suggesting other sources of new
supply will still be needed.

Shale companies are borrowing heavily to finance their drilling and while many now claim to be
have squeezed down costs to the point they can generate cash at around $50 a barrel, Mr
Andurand argues their results so far suggest a higher price could be necessary to turn consistent
long-term profits.

“At current prices I’m not sure US supply can grow significantly over time,” he says, adding that
day-to-day costs for oil producers would also rise once companies started investing more in
future production again.

“There will be cost inflation on the way. Will [shale] be profitable one day? Only if prices go up
significantly.”

Energy Aspects, sums up the current market stasis, warning that the shale resurgence risked
making traders complacent, with low prices boosting demand and strong signs the physical
market is already tightening.

“Against the current economic backdrop, $45-$55 oil is simply too low and is boosting demand
materially,” says the London-based consultancy.

“Yet the market will simply not allow oil prices to rise above $55 because of the fear that shale
will inundate the world with oil,” it adds, arguing that inventories may fall to a “critical” point
before prices are forced to push higher, mirroring the industry’s historic boom and bust cycle.
https://www.ft.com/content/2bcb2dfc-7d14-11e7-9108-edda0bcbc928 2/3
8/10/2017 Andurand hedge fund’s $100 oil bet stands out from the herd

“The pattern will be the same as it always has been,” say Energy Aspects.

Mr Andurand has also taken aim at the oil majors who have talked up their target of comfortably
making money at $50 a barrel and below. He argues they can only claim to achieve this by
slashing investments in all but the most straightforward projects.

On average 40 new developments were approved annually between 2007 and 2013 by the oil
majors, but this fell to 12 last year. The International Energy Agency warns that under-
investment in the oil industry will store up serious problems for the future.

While Royal Dutch Shell says that it sees demand peaking, others, including ExxonMobil, expect
global demand to keep growing far beyond the 100m b/d level it is set to crest next year, even if
electric cars become a much bigger part of the market. About three-quarters of oil demand
comes from sources other than cars such as freight transportation, aviation and petrochemicals.

“A project that cost $80 a barrel to develop before the price crash may cost a little less now, but
they still can’t do it at $45 a barrel,” say Mr Andurand.

Brent crude contracts for delivery in 2020 are currently trading below $55 a barrel.

If Mr Andurand is right, there is a lot of room for the price to rally.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles
from FT.com and redistribute by email or post to the web.

https://www.ft.com/content/2bcb2dfc-7d14-11e7-9108-edda0bcbc928 3/3