Oil prices are set for wild swings after OPEC's decision to let the market find its level, says the hedge fund manager famous for calling the 2008 oil price spike and crash, adding that U.S. producers are set to feel pain.
Pierre Andurand, whose $350 million fund made an 18 percent return last month by betting on the oil price falling, said Saudi Arabia was no longer trying to control supplies in the face of a wave of U.S. shale oil output.
"The fact Saudi is not going to be the marginal producer means more volatility," Andurand, of London-based Andurand Capital Management, said. "And that means bigger moves for traders to take advantage of."
OPEC, led by its biggest producer Saudi Arabia, decided in Vienna last week to defend its market share rather than cutting production to defend prices, in a bid to force higher-cost U.S. shale producers to slow or cut output.
The 37-year-old fund manager's previous fund BlueGold returned more than 200 percent in 2008 by calling the spike - and subsequent crash - in oil prices that year. The fund enjoyed two out of three positive years after that, before shutting at the end of 2011 as the co-founders went their separate ways.
Relaunched as Andurand Capital in 2013, the French fund manager said five weeks ago that oil prices could fall as low as $50 a barrel, a call that looks increasingly prescient.
Oil has fallen almost 40 percent from over $115 in June to a five-year low below $68 a barrel last week. [O/R]
While some forecasters say some U.S. shale producers may have to stop production if prices fall below $80 a barrel, those estimates have largely been revised lower. Many small producers have hedged their output at higher prices for 2015, and are finding ways to squeeze down costs.
"Prices might have to go down at a level between cash cost and marginal cost to slow production fast enough," Andurand said, adding market forces would always be slower to respond than agreed production cuts by OPEC.
Andurand believes that level will still be around $50 a barrel, before prices stabilise around $60 a barrel. Eventually a tighter market should spur a new rally.
"There needs to be real pain in the oil market before the price can go back up, that means potential bankruptcies for high cost producers," Andurand said.