Oil is poised to post its fourth consecutive week of gains, and the outlook remains optimistic thanks to supply constraints and strong demand. But a hedge fund manager is even more optimistic than that.
Doug King, head of the Merchant Commodity Fund, posted record returns last year, gaining 74% in 2021 and beating his previous record of 59% set in 2014 – another boom year for oil just before the crisis. But now King expects further increases in the price of oil, saying it could even hit $200 a barrel in the next five years.
“We believe in supply-side structural commodity inflation that most will never have seen – the highest since the 1970s,” King told Bloomberg in an interview, adding, “Only OPEC will react to price action and they undervalue every month.”
OPEC and its OPEC+ partners are struggling to produce as much as they agreed under its production control deal that came in response to the devastation the pandemic has wreaked on the market oil in 2020. Only a few members of the extended cartel have the capacity to increase production in line with quotas while the rest are struggling, raising concerns about future oil supply in a high demand situation.
“In practice, far less oil is going to market,” the Merchant Commodity Fund wrote in its letter to investors, as cited by Bloomberg. “Its members are simply unable to return to pre-covid production levels. This is all due to a lack of investment.
Russia is a notable example of a producer approaching the limit of its available production capacity, the fund’s management also notes in the letter.
This means additional upside potential for prices, especially if demand remains as strong as it is now.
By Irina Slav for Oilprice.com
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