World’s largest hedge fund sees Brent at $80 on OPEC cuts

DAVOS, Switzerland (Bloomberg) -- BBL Commodities LP, one of the world’s largest oil-focused hedge funds, believes Brent crude will climb to $80/bbl this year as stockpiles drop rapidly on the back of production cuts made by OPEC and its allies.

"We think the market is vastly overestimating the near term inventory buffer," Jonathan Goldberg, the founder of BBL Commodities, said in an interview last week. "Given the rise in demand over the past five years, inventories are especially low as a measure of forward cover."

With crude inventories down, Goldberg expects Brent to climb about 15% from current levels of $68.50/bbl to about $80/bbl. He also sees further gains in the premium of spot prices to prices further in future, a structure known in the oil market as backwardation. "We see backwardation stepping up," he said.

Measured as the price difference between the spot contract and the contract for delivery in six months, Brent’s backwardation stands at $1.60/bbl, up from minus $0.49/bbl in August.

BBL Commodities, with about $600 million in assets under management, is one of the few remaining oil-focused hedge funds, alongside Andurand Capital Management, run by the eponymous oil trader, and David D’Alessandro’s CMDTY Capital Management. The firm returned about 2% last year.

Goldberg, who cut his teeth trading oil for Goldman Sachs Group and Glencore, before setting up New York-based BBL Commodities in 2013, said that OPEC had shown "tremendous discipline" with its oil output cuts.

"They have listened to the marketplace and have done an outstanding job complying with lower export quotas. However, it is imperative they maintain this discipline," he said. With U.S. shale rebounding fast in 2018, he said that "if OPEC falters in their commitment to complying with the export agreement, oil prices will decline quickly and sharply."

Goldberg was one of the handful of oil hedge fund managers and traders that met in secret with Saudi Arabia oil minister Khalid Al-Falih last summer to discuss the energy market, according to people familiar with the matter, who asked not to be named discussing a private meeting.

Goldberg cautioned that his bullishness was short-term.

"We are not long term oil bulls," he said, adding he didn’t share the view put forward by others -- oil trader Trafigura for example -- who forecast higher prices on the back of falling investment by energy companies.

"It’s true that capital expenditure in the oil industry has declined over the last few years, but that’s largely the result of efficiencies in finding oil," he said, pointing to shale as an example of how easy it is to discover oil deposits. "The industry simply requires less dollars. We think we are in a very bullish part of the curve in 2018 but that dynamic will change over time."

In particular, Goldberg said that beyond 2020 electric vehicles could have a significant impact on oil demand and prices. "Electric vehicles are an existential threat to the oil industry," he said.