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Andy Hall Astenbeck Capital Q2 Letter: The Missing Barrels

Andrew Hall's letter to Astenbeck Capital investors for the second quarter ended June 30, 2015.

Dear Investor

Last month was brutal for most commodities and anyone investing in them. Except for the very nearby contracts oil prices fell to new lows for the year. Precious metals prices made multi -year lows while the Bloomberg commodity index touched a thirteen year low.

Andrew Hall - Astenbeck Capital: Renewed fears of Grexit

While renewed fears of Greece exiting the Euro zone and the sell-off in the Chinese equities markets provided ample macro worries there were other reasons provoking the declines. For metals the prospect of the Fed imminently raising interest rates provides a strong headwind. For oil the successful conclusion of the P5 + 1 negotiations with Iran over its nuclear program weighed very heavily. Even more importantly, the perception of a large and persistent crude oil glut is now endemic and has triggered a massive shift in sentiment - one that we frankly did not anticipate. One reason for that is that we see fundamentals continuing to improve and believe there is something of a disconnect between perception and reality.

That perception is colored by the IEA’s most recent Oil Market Report (OMR) which estimates that global oil supply in (12 2015 exceeded demand by a staggering 3.3 million bpd. For 2015 the IEA is effectively predicting a surplus of supply over demand averaging more than 2 million bpd that continues through 2015 and 2016. The nearby chart shows the IEA’s implicit forecast of the cumulative supply excess since the end of 2014. Its supply and demand balance is much more negative than the others we look at.

However, the IEA forecast is the one used by most oil analysts on Wall Street as the basis for their own forecasts. For that reason the consensus view is now extremely bearish.

The latest data from the IEA is difficult to reconcile with what has actually been happening in the oil market however. If there had been a 3.3 million bpd surplus in OZ the contango would have exploded as oil would need to price itself to make it economic to carry in ever scarcer and therefore costlier storage. That did not happen. In fact the contrary was the case - contango narrowed for Brent and WTI and the Dubai market moved from contango into backwardation by the end of 02. This is not suggestive of a growing crude oil surplus.

Even more striking is the absence of an increase in...