• Until inventories fall demonstrably, market will have difficulty adding to gains
• If contango stays, prices could be capped at $55/barrel levels
• If backwardation occurs by middle of year, mid $60 levels likely

By Barani Krishnan
NEW YORK, Feb 7 – Prominent oil bull Andy Hall posted a 5 percent loss at his hedge fund in January, telling his investors to brace for more market volatility under President Donald Trump and not expect hefty price gains in crude until OPEC supply cuts take effect.
” ‘May you live in interesting times’ is a blessing (or curse) supposedly attributed to the Chinese, which seems particularly apt as we enter the Year of the Rooster, ” Hall said in a Feb. 1 letter circulated to investors in his $2.3-billion Southport, Connecticut-based Astenbeck Capital Management.
“Things certainly appear to be getting interesting as the Trump Administration wastes no time in overturning apple carts both at home and abroad with the implementation of its policies,” Hall wrote.
Oil prices hit 19-month highs in the first few days of 2017, with benchmark Brent climbing to $58.37 a barrel and U.S. West Texas Intermediate (WTI) $55.24, before pulling back as rising U.S. drilling activity offset OPEC efforts to prop up the market.  The market’s recoil since has tripped up Astenbeck, forcing the fund to post a 5 percent drop in January, its first monthly loss since October, according to a performance note accompanying Hall’s letter.
Astenbeck returned 8 percent in December to finish 2016 with a 26 percent gain, after a pledge to cut supply by the Organization of the Petroleum Exporting Countries and 11 non-OPEC producers  helped crude prices double from lows hit earlier in the year. Astenbeck has only done better in 2009, when it posted a 28 percent profit as oil prices rallied powerfully that year from the lows of the financial crisis.
This month, oil has continued its decline, with Brent settling at $55.05 a barrel on Feb. 7 and WTI at $52.17 on renewed worry that supply was overtaking demand.
While OPEC had defied skeptics that it would cut output, the market needed proof of significant stockpile declines for further price gains, Hall said.
“Until inventories are falling demonstrably, the market will have difficulties adding to the gains made at the end of last year (absent some geopolitical event, the odds of which have probably shortened),” he wrote. “These cuts have yet to show up in the published inventory data — at least for the U.S. — which is what the majority of market participants pay attention to.”
For the week ended Jan. 27, U.S. crude stocks rose by 6.5-million barrels, far exceeding a 3.3-million barrel rise expected by analysts, government data showed. In contrast to that, a Reuters survey found OPEC had delivered by January on about 82 percent of its deal to lower supply by 1.16 million barrels per day (bpd).
Hall said production cuts by OPEC made in December and January will not be reflected in U.S. inventory data until February. “In fact, refinery turnarounds may delay a significant decline in U.S. inventories until the spring.”
With OPEC’s output remaining at about 1 million bpd lower than averaged in 2016, the cartel’s kingpin Saudi Arabia may not feel the need to extend production cuts beyond the intended duration of six months, he added.
If the market remains in “contango” — with spot oil trading at a discount to consignments meant for later delivery — prices could be capped at current levels of around $55 a barrel, Hall said.
“A deferred futures price for WTI below $60 is probably required to discourage excessive growth in U.S. oil production — at least until such time as OPEC spare capacity is exhausted.”
If “backwardation”, or the reverse to contango, occurs, mid-$60 levels were likely as the spot contract pushes above deferred months,  Hall said. “Other things being equal, that should occur sometime toward the middle of next year.”
Hall said oil traders were also anxiously watching to see if the Trump Administration would go ahead with a border adjustment tax (BAT) which could make Brent hugely costlier versus WTI, causing a windfall for U.S. oil producers and exporters.
“A 5 percent tariff would add $2-$3 per barrel to the price of WTI relative to Brent, while a 10 percent tariff would add $4-$6 per barrel,” he wrote. “Depending on its final structure, a BAT could add as much as $15 per barrel to the relative value of WTI.  Without a tariff, WTI should trade at a $1-$2 per barrel discount to Brent.”