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UBS, Andrew Hall: Oil Price Will Rise Again; Buy When Still Low
Aspire | 03 November 2015
By: Lim Si Jie
Articles (169) Profile

Crude oil took a dip after a week of rally following the IEA’s forecast that the world oil market would remain oversupplied for at least another year despite falls in output from non-OPEC producers.

There was additional pressure on crude oil prices when secondary sources cited in OPEC’s monthly report said the group pumped 31.57 million barrels per day (bpd) in September, up 110,000 bpd from August and almost 2 million bpd more than its predicted demand for this year.

Despite the bearish outlook on crude oil, Swiss Bank UBS believes that oil is likely to head back to $70 a barrel in the next six to 12 months.

EIA: US Oil Production Falling

In early October, there was a large drop in US oil rigs. US oil-directed rigs fell to a five-year low of 614 a few weeks ago, according to Baker Hughes, and then to 605 in the latest data released.

In addition, the US Energy Information Administration (EIA) estimates that US crude production dropped by 120,000 barrels per day to a 12-month low of 9.01 million barrels per day from August to September. The EIA also raised its oil-demand growth forecasts for 2015 and 2016, while cutting 2015 non-OPEC supply growth.

Emerging Economies Driving Oil Demand

In emerging Asia, oil demand has been resilient despite worries on emerging economies. In China and India, demand for oil rose by around seven percent in August year-on-year. Regionally, oil demand is primarily supported by gasoline consumption. UBS expects global oil demand to climb by 1.7 million barrels per day this year, its fastest pace in five years, supported by the low oil prices. While market concerns of a Chinese hard landing have increased lately, UBS believes that such an event has a low probability of occurrence.

Andrew Hall: Supply Deficit In 2016

UBS’ view on the oil market is supported by Astenbeck Capital’s hedge fund head Andrew Hall, who has made a name for himself by making big bets on rising prices and reaping billions of dollars in profits betting on oil.

Despite his hedge fund being on track for its worst year since its inception in 2008, Andrew Hall has emphasised in letters to investors that low prices are spurring strong growth in oil demand. He points to the jump in U.S. sales of sport-utility vehicles and a rise in the number of miles driven nationwide. He predicts that the world could experience a “sizable” deficit of supply by the second half of 2016 that could drive prices higher.

T. Boone Pickens: $70 Call on Oil Is Wrong

On the other hand, hedge fund chair of BP Capital Management T. Boone Pickens, who until recently was bullish on oil, took a turnaround on his outlook for oil. The biggest reason cited by T. Boones: OPEC.

He thought that the Organization of the Petroleum Exporting Countries — and specifically Saudi Arabia — would cut, or at least maintain production to command a better price.

But OPEC has not cut back or held production at the same level. In fact oil prices have been driven even lower as Saudi Arabia increased production by almost a million barrels a day.

OPEC’s Geopolitical Motive


Reflecting on his call, T. Boone Pickens said that he underestimated OPEC’s determination to keep the flow of oil under their control. The OPEC cartel is controlled by leaders whose top priority is not to make money for stockholders; it is to keep themselves in power.

When it comes to the price of oil, which remains in the mid-forties, all of that gets taken into account. What does not get taken into account is that the nations of OPEC have a long-term strategy, America does not. And, on top of all that, Russia is moving into Syria, which will add a new dimension to the Middle East energy equation.

“Even as OPEC loses money, they are growing their market share. When prices rise, they’ll rake in profits while the competition scrambles to catch up. It’s also a geopolitical move,” commented Pickens.

Investors Takeaway: Buy Oil on Pullbacks to Major Support

While oil prices are expected to fluctuate in the near future, one thing is certain: OPEC will not be able to withstand low oil price in the long run. The eventual outcome will be an eventual rise in oil prices.

With oil futures bottoming at $42, there are opportunities for investors to long oil futures (WTI, Brent). Investors should expect oil prices to move horizontally at current price and pick golden opportunities to buy on pullbacks to enter at an attractive price.

Brent Crude (ICE EU), Source: TradingView

West Texas Intermediate (WTI), Source: TradingView

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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