March 9, 2020

Pure retaliation—that’s the best way to describe Saudi Arabia’s response to the latest OPEC meeting. Russia, a non-OPEC member, refused to agree to OPEC’s demands to cut 1.5 million barrels of oil production a day, and that in turn led Saudi Arabian state oil giant Aramco to announce it would open the spigots and cut its oil prices by upwards of $6 a barrel. That’s what caused crude oil prices to fall some 32% Sunday night to about $28 a barrel, levels not seen since the bottom of the last crash in February 2016 . The acrimony has been so bad Iranian Petroleum Minister Bijan Zangeneh called the meeting “one of the worst ever.”

“It’s a complete breakdown,” says Renee Haugerud, founder of the commodity-oriented hedge fund shop Galtere, about the meeting. “We could go down below $20 [a barrel].”

Haugerud didn’t predict the crash, but she’s been prepared for it. She’s long believed that overproduction in the U.S. from fracking and the rise of alternative energy would put a damper on oil prices. Haugerud also manages the SilverPepper Commodity Strategies Global Macro mutual fund (ticker: SPCAX), and her bearish stance is largely responsible for the fund’s success. SilverPepper has beaten its peers since its 2013 inception, and the fund’s oil underweight led it to beat the average petrol-heavy commodity fund by 11.1 and 16.6 percentage points, respectively, in 2014 and 2015—two brutal years for oil. Any oil exposure she had in 2019 she largely hedged to protect the downside.

Coming into 2020, she expected oil prices to be range-bound after ending 2019 at $61 a barrel, projecting a price of $55 a barrel; after the coronavirus news first broke, she reduced her range to as low as $48. As the virus situation deteriorated, she anticipated the OPEC meeting as a make-or-break one with a “binary outcome.” If producers didn’t agree to the 1.5 million barrels a day cut, she thought, “we could go back down to 2015-16 lows.” Unfortunately, her predictions have come true.

Worse, Saudi Arabia may not be the only player waiting to glut the oil market. According to Warren Patterson, ING’s Head of Commodities Strategy: “The end of the deal risks bringing 2.1 [million barrels per day] of supply back to the market, and it is also not unrealistic to think that Libyan output may return to normal in the coming months, bringing a further 1 [million barrels per day] of supply.” With an extra 3.1 million barrels each day pouring into a slowing global economy full of consumers terrified of a pandemic, it will be rough sledding for the oil sector going forward.

OPEC Deal CollapsesOil prices plummetSource: FactSetNote: Crude oil continuous contractAs of May 19, 1:10 p.m. ET
May 15noonMay 18noonMay 19noon27282930313233$34May 15, 2020 7:30 a.m.x$28.28

Oil prices dropped fast on Sunday after a difficult OPEC meeting