Cofounder & CIO, Andurand Capital
Andurand Capital Management CIO Talks Oil Production | Bloomberg Talks
Pierre Andurand, founder and Chief Investment Officer of Andurand Capital Management says OPEC+ may need to announce ...
About Pierre Andurand
Pierre Andurand, chief investment officer at Andurand Capital Management, said in October 2024 that the short-term risk for oil prices is to the upside due to low inventories and geopolitical risk. He stated that if Israel strikes Iranian oil export facilities, the market could lose 1.7 million barrels per day, potentially pushing prices $10 to $15 higher, though he noted that Saudi Arabia, the UAE, and Kuwait could increase production to compensate over time. Andurand described the medium-term outlook for crude as balanced, citing large non-OPEC supply growth and slowing demand growth, but said speculative positioning is at an all-time low. In earlier appearances, Andurand discussed OPEC+ dynamics and European energy security. In November 2023, he said OPEC+ had not effectively cut production despite announced reductions, and that the market needed more OPEC oil. In November 2022, he argued that Europe could avoid Russian gas entirely by reducing residential and commercial demand by 15% and power demand by 5%, and that a price cap on Russian oil was possible but required careful enforcement. He also stated in 2014 that he expected oil prices to fall significantly lower before the market would rebalance.
Transcript (23 segments)
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Interviewer0:00
Pierre Andurand, who joins us now. Pierre, thank you first of all for joining us. I mean, OPEC Plus is always rather exciting because they've surprised you in the past, but actually if you look at the price of oil, they've always been right. What are you expecting them to do this time around?
P
Pierre Andurand0:13
It's a bit tricky. So I think the Saudis would want to see higher prices, but when you look at current OPEC or OPEC Plus production or exports over the last month or two, they've been the same as the average of the last year. So despite all the announcements of cuts, OPEC Plus as a group has not cut much production at all since last year. Saudi cut, but against that, we had a lot more oil from Iran and more oil from Iraq and from West Africa. So overall, we haven't had much OPEC Plus cuts. So I think the Saudis will probably want the other countries to cut as well. So I think it's going to be a negotiation where the Saudi will probably use that lollipop cut as a potential stick if the other countries don't cut more. And why I think we need a cut is actually we had much larger US supply growth than expected this year. So we had 1.5 million barrels a day total liquid growth relative to last year, which is one of the top three supply growths in history in the US. So we were expecting much slower supply. And also a lot of Iranian oil came back, and we didn't lose any Russian oil pretty much, and we had more oil from Iraq and West Africa.
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Interviewer1:40
So what does a meaningful cut actually look like that you think will be achieved? I mean, there's so much geopolitical uncertainty as well. I wonder whether everyone's a little bit in a wait and see situation.
P
Pierre Andurand1:50
Yeah, I think in terms of geopolitical risk, people wait for something to happen before positioning for it because so much money has been lost positioning for that and then nothing happened. So look, last year Russia invaded Ukraine and we didn't lose any oil, and we got some SPR release, so actually it was a bearish event for the oil market. Since 2005, people have been positioning for a war with Iran and losing money because it never happened. So I think the market generally tends to discount potential geopolitical risk, wait for the supply disruptions to happen, and then the price moves. So I don't think it's over, and potentially we could have disruptions, but they have not happened yet. So I think we have to go back to fundamentals, looking at supply growth versus demand growth. Demand growth is very strong. So despite all the fears of a really weak macroeconomic outlook, demand growth this year is estimated to be around 2.3 million barrels a day, which is twice the average demand growth. So demand growth is not the issue, and we still have some recovery to happen post-COVID because some countries have not fully reopened, mainly in Asia. So I think there's still a bit more demand growth to come, but the supply has been the issue, a lot more supply than expected.
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Interviewer3:10
So you started the year by calling oil to be at around $140 a barrel. Are you sticking to that?
P
Pierre Andurand3:18
No, not really, because I bring it down because we had a lot more supply from Iran. I didn't expect the US administration to close their eyes and stop enforcing Iranian sanctions, so Iran exports pretty much as much as before the sanctions. And US supply growth is probably 700 to 800,000 barrels a day higher than expected. And then we didn't lose oil from Russia, we got more oil from Iraq. And our new forecast will depend a lot on what OPEC will do this weekend, right? So it's hard to stick your neck out. The markets are finally balanced, they are not massively oversupplied or undersupplied, it's finally balanced. So it's all at the margin. If OPEC does a cut large enough, so I would say like a million barrels a day lower relative to current production, then the market will go up. If they try to micromanage the market month to month, I think it will stay here or go a bit lower. And if the other OPEC members do not want to cut and Saudi has to be the only one cutting, I think they will give up and potentially bring some production back online, and then we'll go much higher. So it will depend a lot on that meeting. So I'll have probably a better opinion on Monday.
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Interviewer4:35
So you'll come back on Monday. How's your fund doing? I know you've had some ups, you've had some downs. How difficult is it holding on first of all to your clients?
P
Pierre Andurand4:45
Holding to the clients is okay for now because most of them have been with us for a very long time. So they've seen a lot of good years, and so they don't leave at the first sign. We recovered in the past from large drawdowns. It's just about being patient. I know that for me, the worst kind of markets are those kind of markets where there's no clear direction and it's very volatile. For the last year and a half, we have many times where oil prices would go down $10 in one or two days for no reason and then go back up. So when you have a strong view, and a strong view means a strong position, you end up being chopped by that volatility. And I've always done badly in those type of markets, but they tend to be maybe 10% of the time we have those markets, and then we have the markets that are more obvious where it goes in one direction for some time, and that's when we tend to do well.
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Interviewer5:36
Why do you think it's these kind of markets that we're living with? Is it geopolitics at the margins that are so difficult to read, or is it actually countries that have behaved in ways that you weren't expecting?
P
Pierre Andurand5:47
I think it's a lot of random events. Right, as I said earlier, it's the fact that you have a lot of countries raising production at the same time, some cutting. And basically, what makes the oil price is supply minus demand. When inventories go down strongly, prices will go up and vice versa. So when you're in a situation where you have the supply increase meeting the demand increase, and it's hard to forecast what the supply increase will be next year and the demand increase, the markets are volatile and they don't go anywhere, and then that's when it becomes choppy.
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Interviewer6:24
What's your take on China again? This is the biggest, we saw foreign direct investment going into China negative for the first time since on record. But it's unclear again, they're opening, we don't know how much support the government will actually give to some of these real estate developers.
P
Pierre Andurand6:39
Well, I think they want to be careful because there's been so much speculation going into real estate, prices are just so high. So I'm not sure they'll come with a bazooka. I think it's going to be marginal help. But for the oil market, I don't think that the Chinese real estate market is such a driver for oil. I mean, it can be a marginal plus, but it's not what's going to drive the market going forward.
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Interviewer7:05
So what's your outlook for the oil markets in 2024? There's a lot of unknowns.
P
Pierre Andurand7:11
Yeah, it's a lot of unknowns, so it's hard to have a strong opinion now. So I think it will depend a lot on what OPEC decides on Sunday, really.
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Interviewer7:20
If we have Trump back in the White House, does that change the course of the price of oil or certainly how much they'll produce maybe?
P
Pierre Andurand7:28
I don't think it will change anything for the US supply because despite all the talk that Biden was hard on production growth, we have one of the top production growths ever in the US. So it's more driven by technological improvements and these kinds of things. But where it can have an impact is if Trump was to come back and he goes hard on Iran and he goes hard on Venezuela, then we lose some oil and it could be marginally positive for the oil price. So it's going to be more from foreign policy than domestic policy.
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Interviewer8:04
But a lot of people are actually expecting a surplus in oil because of the economy going down and a lot of supply out there. Do you expect a significant downturn in some of the Western economies?
P
Pierre Andurand8:16
Well, the thing is, when you look historically, if you have a normal recession, you don't lose much oil demand. It's quite marginal. You lose like half a million barrels a day relative to a trend. And so it's nothing relative to what OPEC could cut or how much supply could disappoint. So I think on its own, a weak economy or even a recession is not enough to bring prices down. But if you have a weak economy coupled with a very strong supply growth in the US and OPEC not cutting, then yeah, of course it's negative for oil prices. But on its own, when you look historically, we had 2008-2009 brought a strong demand decline, but that was not because of a recession, it was a full-blown financial crisis. The world stopped. And obviously the COVID pandemic. But when you look at average recessions, you don't lose so much demand, it's quite marginal.
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Interviewer9:07
So if you look at the markets and the way there's positioning on the oil markets but also in treasuries and everything else, what are people misunderstanding? What are they getting wrong?
P
Pierre Andurand9:17
I don't know if they're getting it wrong. So far it's more me getting it wrong. But I would say the positioning for oil, the hedge funds are very short, or at least the speculative length is close to all-time low. So I think they're looking at... it's hard to know what they're looking at because you have a lot of different funds. But I think the macro community in the US is probably focused on demand growth disappointing, a weak economy to come, and then weak demand. But so far demand kept on being revised up, so they've been wrong on that point. Will it come next year? Maybe, maybe not, because I think there's still some demand recovery from post-COVID to come. So I don't think demand will really be the issue. But the funds are actually quite short now, and they're short going into a big OPEC meeting. And I think Prince Abdulaziz probably knows that they're short, and he might want to surprise them. But the other countries will have to cut as well.
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Interviewer10:16
Going into this big OPEC Plus meeting, what do you do? How do you actually work to take a big position before? Do you just wait and see and then decide?
P
Pierre Andurand10:24
I think it's better to wait and see. I think it's more likely that it would be a bullish outcome, but there's also a low probability event that it might be a very bearish outcome. I think it's more like a 10 or 15% probability in case the other OPEC members do not want to cut. So there's a 10% probability maybe that we go much lower as well. So in a way, you probably want to be positive going into that meeting, but be careful of the sizing in case something bad happens. And generally, the market doesn't price news right away, it tends to diffuse over time. So it's better to wait for the result, analyze it, and then if it's obvious, put the position after.
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Interviewer11:05
Interesting. Pierre, thank you so much. Founder there of Andurand Capital Management, Pierre Andurand.