One of the best known, successful commodities traders has hit a
rough patch of late.
After a losing 3.83 percent in 2011, funds managed by Andrew
Hall’s Astenbeck Capital Management gained less
than 3 percent through November 2012, according to a January 2
letter to investors. Hall is a long-time oil trader who once
stirred controversy over a $100 million bonus, when former
employer Citigroup sold the Phibro commodities unit that he
headed to Occidental Petroleum in 2009.
Astenbeck, with about $4.8 billion in assets under
management, obviously isn’t alone in showing weak
results. Several commodities funds have had down years
recently. The Barclays CTA Index of commodity traders has
posted losses in the low single-digits in each of the past two
years, while Christian Levett’s Clive Capital
fund, which had a strong run a few years ago, posted losses in
the high single-digits in 2011 and 2012.
This is probably little solace to Hall, who stresses in his
investor letter that he seeks "superior absolute returns."
Relative returns are not his game. Hall does not explain in the
report why his returns were so low in 2012. He did not return a
call seeking comment.
The firm’s family of funds includes the
$3-billion, Astenbeck Master Commodities Fund II, which invests
primarily in commodities, including crude oil, refined oil
products, natural gas, metals and agricultural commodities. The
fund also makes bets on currencies. At the end of September, it
had about $610 million in U.S. commodity-related
British-born Hall has had a long history in energy trading.
He spent several years working at British Petroleum in the 70s.
He joined Phibro — a subsidiary of Salomon Brothers at
the time — in 1982 as an oil trader, eventually
becoming president, and later chairman and chief executive.
Travelers bought Salomon — and Phibro — in
1997, and then merged with Citigroup in 1998. Citigroup sold
Phibro to Occidental in 2009 after Hall battled the bank over a
$100 million bonus, a sum equal to what he had also earned in
2008 when the banking system nearly collapsed. The sale helped
Citi avert a potential clash with the Obama administration over
Hall owns 80 percent of Astenbeck; Occidental Petroleum owns
the other 20 percent. Hall is also the CEO of Phibro Trading, a
commodities trading firm and Occidental subsidiary.
Since it was launched in January 2008, Astenbeck Master
Commodities Fund has generated a total return of 49.45 percent,
through November 2012. This compares with a loss of 34.10
percent for the S&P GSCI, previously called the Goldman
Sachs Commodity Index (the index captures the returns of
various commodity sectors and the benchmark to which Hall most
Commenting in his investor letter on what lies ahead, Hall
disputes some reports predicting that shale oil and the
abundance of natural gas could lead to an oil glut, resulting
in sharply lower prices. He argues that reality is a little
different from this popular perception.
In part he points to a widely read Exxon report that
forecasts a greater contribution to future global supply growth
from oil sands, deepwater offshore oil and natural gas liquids
(NGLs) than from shale oil. While acknowledging that shale oil
will significantly boost U.S oil production and will help
reduce the country’s dependence on oil imports, he
says he does not expect shale oil to be a major contributor to
future supplies on a global level.
"We surmise that shale oil is expensive to produce and its
cost of production is likely only to rise in the future," Hall
writes in his letter. "For this reason the continued growth of
shale oil production will require a high price environment and
its development will therefore not lead to a significant and
sustained drop in prices."
Similarly he disputes notions that the abundance of oil in
Canada’s tar sands can theoretically pressure
global prices downward. Hall argues the cost of producing oil
from tar sands is greater than for the oil in Saudi Arabia, and
the rate at which it can be extracted is lower than it is for
Saudi oil. He says, depending on the forecaster, the break even
point from the Canadian tar sands ranges from $60 per barrel to
as high as $110, as determined by the required process for
extracting and processing the oil.
Hall also shoots down predictions that deep-water offshore
oilfields could contribute significantly to future supply, most
notably the pre-salt fields of Brazil. He cites the enormous
technological challenges and skepticism that the fields will be
developed in a timely manner, underscoring what he calls
"resource nationalism" and the conflicting policy priorities
faced by Petrobras, Brazil’s largest oil producer.
"We believe that because of these issues, the chances of
lengthy delays in the development of the pre-salt resources are
quite high," he adds.
NGLs, hailed in some places as an energy supply savior,
cannot be refined into transportation fuels, something that
Hall asserts is critical to drive future oil demand growth.
"The most striking feature of the future oil supply story is
how hard the industry will have to run to stay in place," Hall
So, what does all this mean for future oil prices? Hall
believes that, although it’s unclear how high
prices can go, there is a low probability that prices will fall
in the future. "And if it happens, it will not be because of a
flood of high-cost oil — rather it will be because of
global economic growth surprising materially to the downside in
the years to come," Hall indicates.
From a trading standpoint, he says oil today can be bought
in the forward market at nearly a 30 percent discount in real
terms to today’s price. This "substantial margin
of protection against that risk" is well worth taking, he
As for metals, the focus is mainly on platinum, which he
says continues to offer the best fundamentals heading into
Palladium prices continued to rise slowly in December,
supported, in part, by strengthening global auto sales,
according to the letter. Prices are also benefiting from a new
shareholder agreement at Russia’s Norilsk Nickel,
the world’s largest nickel and palladium producer,
calling for a substantial dividend payout. "This, along with
challenging geology virtually eliminates the possibility of
meaningful (or perhaps any) volume growth in coming years,"
Hall enumerates other factors: Swiss trade statistics
confirming weak Russian palladium exports in 2012, a new
closed-end fund that created some additional buying of
palladium over a relatively short period of time, and until
recently labor stoppages in South Africa.
The outlook for copper is"more nuanced," he says. Demand is
heavily driven by power and infrastructure spending in China,
growing global auto demand, the improving U.S. housing market,
and low per capita consumption in developing markets. He adds
that the industry is struggling to maintain production levels
and supply growth is concentrated "in more challenging
geographies and geologies." However, in the short term the
industry faces supply pressures from several sources. "On
balance, we like copper, but at lower levels," Hall says.
Hall is seemingly bullish on corn. He says new crop corn
futures are pricing in robust output growth. Yet inventories
are relatively low and there are some incentives to plant soy
instead of corn. "With a fourth straight year of disappointing
production — which is a real possibility —
corn prices could easily test the high single digits," he
What of equities? Hall says he generally invests a modest
portion of the portfolio in stocks that are compelling value or
are well-positioned in the oil industry.