Crude oil prices turned lower as the long-time oil bull, formally known as the "oil god,” threw in the towel on his largest Astenbeck Capital Management LLC commodity fund. Not only did he close the fund, he shook his bullish followers with a blasphemous statement that oil may be stuck around $50 a barrel or lower, I guess, forever.
In one of the most challenging years in oil trading history for ultra bulls or ultra bears, Hall’s fund was down reportedly around 30% and he decided it was time to throw in the towel as he bemoaned that the crude oil had materially worsened. This caused other oil bulls to be shaken and start to sell. It raised fears that the unwinding of this fund might cause more selling even if it’s unclear as to when he started to wind the positions down. Yet, is this former oil deity, who has been brought back down to mere mortal status, getting out when it is really time to get in?
There are many styles of trading. Some are short term and some are long term. Some of the biggest profits I have ever seen in trading came only after the trade took some extreme heat. Obviously, that style is not for most but if you believe that at some point the fundamentals will eventually win out and if you have deep enough pockets, you can sometimes ride out market moves and get to the point where the fundamentals will eventually come into play and prices will be forced to certain levels as the supply and demand fundamentals play out and finally become clear.
Of course, sometimes you are wrong and you must admit it and get out and take your lumps. But in the vicious world of trading, with flash crashes and news flow, you are sometimes wrong about being wrong. You are just so beat up psychologically, feeling that you question yourself and let the market convince you that you were wrong. That’s why so many people, after a losing trade, sell at the bottom just as the market starts to turn around.
So, the reports that Hall decided to close his fund last month was before the news flow started to justify his bullish outlook the he had in the beginning of the year. Hall predicted that the oil market would fall into a deficit, reducing global supply. That is now starting to happen. He predicted that low prices would heat up demand. That is starting to happen. He predicted that shale oil would start to falter. That too is starting to happen.
Let’s start with shale oil concerns. I have brought up concerns about shale oil production and its current production cycle. I have spoken about uncompleted wells and financial issues as well as steep production decline rates that seem to be accelerating. Shale drilling stocks have been getting hammered. Firms like Pioneer and Pacific Drilling are said to be mulling the idea of bankruptcy against warnings by Halliburton about a slowdown in shale. Now a report by Bloomberg News is warning that the, “the wild shale race may be harming the U.S. oil trove.”
Bloomberg reports that the, “frantic shale race may be causing some long-term damage to assets in the Permian and other major U.S. oil fields."
As production from wells rapidly decline, drillers are rushing to add new ones at a faster pace to keep increasing output. The problem is that drilling multiple wells closer together is contributing to the drop in established ones, and sometimes causing harm that can’t be fixed. Output from legacy wells, a term that in the fast-pace shale world includes those that are just a month old, is dropping by 350,000 barrels a day every month and has fallen steeply since 2012, according to data from the U.S. Energy Information Administration.
Unlike offshore wells in the Gulf of Mexico, which can produce for decades, shale wells can peak within months and sometimes cease after two years. Eager explorers may undercut the life of wells by over-drilling, said Russell Clark, investment manager at Horseman Capital Management Ltd. So-called frack hits occur when drilling in one well interferes with another, causing a pressure transfer that can disrupt or stop production. "New well production is increasingly cannibalizing legacy production," Clark wrote in a report. "The decline rate looks to be accelerating." A must reads in Bloomberg.