LONDON: Crude oil may reach a record $130 a barrel this year because pension funds are investing more in commodities, said Pierre Andurand, the chief investment officer of BlueGold Capital Management, a hedge fund.
The outlook for oil over the next five years is also “bullish” as producers find it hard to replenish reserves, and demand outpaces supply, London-based Andurand said.
Oil companies such as ExxonMobil, Royal Dutch Shell and BP are finding it tougher to replace their findings and are drilling for harder-to-reach deposits while energy demand and crude prices surge to records.
With commodities prices surging to all-time highs, the California Public Employees’ Retirement System, the largest US pension fund, said it plans to boost investments.
“There’s a lot of index funds flowing into oil, and the world is under-invested in commodities, especially pension funds,” said Andurand, who used to trade energy derivatives in Singapore and London for Vitol Group.
“Oil is now a medium-to- long-term outlook story, and it’s bullish in terms of fundamentals of production constraints.”
Calpers, which has about $240bn in assets, agreed at a February 19 board meeting to hold between 0.5% and 3% of its assets in commodities, spokesman Clark McKinley said on February 28. The Sacramento, California-based fund last year put $450mn into commodities - its first such investment.
With crude oil trading above $100 a barrel, competition among producers to find untapped reserves has caused a worldwide shortage of rigs and crews.
“Next year, oil may rise even further to $150 a barrel,” said Andurand, whose $300mn fund has so far invested 70% in energy and 30% in agriculture and metals since February.
Andurand is running BlueGold Capital with Julian Reis, who previously headed US-based Tudor Investment Corp’s Singapore unit, and Dennis Crema, who worked as a gasoline trader at Geneva-based Vitol for 13 years.
Commodities have outperformed stocks as oil, industrial metals and wheat prices rallied to records this year. Investments in commodity hedge funds rose to $104bn at the end of 2007 from $73bn in the first seven months of last year, according to data from Singapore-based research company Eurekahedge.
The Standard & Poor’s GSCI index of 24 commodities has risen 14% so far this year, adding to a 33% gain in 2007. In comparison, the Standard & Poor’s 500 Index of stocks has fallen 11% in 2008, while US Treasuries increased by 3.3%, according to Merrill Lynch indexes.
Investors who are flocking to oil may be exacerbating the US dollar’s plunge and pushing oil prices to new highs, according to the president of Cambridge Energy Research Associates.
“What you have normally is the flight to dollars as a refuge, but today instead there is a flight to oil,” Daniel Yergin said in an interview in Washington on March 5. “It reflects not only a weakening of the dollar, but the expectation of further weakening. Oil is a giant hedge against the dollar.”
US economic growth has slowed to 0.6% in the fourth quarter. The worst US housing market in more than a quarter of a century, fueled by $146bn in losses by Wall Street banks, and a decelerating economy have contributed to a plunging dollar and pushed investors to buy oil, which has held its value better than the dollar.
Meanwhile, a survey has shown that crude prices oil may fall next week on signs that fuel consumption in the US will drop because of a weakening economy and the end of the heating season.
Seventeen of 38 analysts surveyed by Bloomberg News, or 45%, said prices will drop through March 14. Fourteen of the respondents, or 37%, said futures will rise and seven forecast that prices will be little changed.
Last week, 62% said oil would drop. Total implied fuel demand averaged 20.6mn barrels a day in the past four weeks, down 3.4% from a year earlier, an Energy Department report on March 5 showed.
US gasoline stockpiles rose 1.66mn barrels to 234.3mn last week, the highest since January 1994, the report said.
“The crude-oil market may continue to draw buying in the near term based on financial factors such as the weakness in the US dollar, but at some stage we think the weakness in the physical market, where gasoline inventories are at the highest level since the 1990s, may gain wider notice,” said Tim Evans, an energy analyst at Citigroup Global Markets in New York – Bloomberg