Astenbeck Commodities Trader Reports Lackluster Gains

January 29, 2013   Stephen Taub

Andrew Hall’s funds gained less than 3 percent through November 2012, after booking a loss in 2011.

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 securities.

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 executive pay.

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 compares himself).

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 writes.

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 adds.

As for metals, the focus is mainly on platinum, which he says continues to offer the best fundamentals heading into 2013.

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 states.

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 adds.

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.



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