Intervale Capital’s Managing Partner Charles Cherington isn’t putting too much faith in the recent oil price rally. After five straight weeks of oil price gains, Cherington told CNBC’s Squawk Box on Monday, March 21 (when WTI was ~$40 per barrel) that he believed prices would go lower. Here’s why:
- Cherington said there’s a 17:1 ratio of underlying derivatives to the underlying commodity that’s lead to a tremendous amount of short-covering.
- And he believes the supply fundamentals remain unchanged – the world is still producing between 1.0 million and 1.5 million barrels per day more than it needs and crude oil inventories are at record highs.
Whether you believe in Cherington’s rationale or not, WTI slid approximately 3% since Monday, and was trading at $39.00 at the time of publication.
This isn’t the first time Charles Cherington has made bold predictions that have been correct.
On August 25, 2015, Cherington told CNBC that oil companies were surviving on credit lines from the banks, that they were on the verge of defaults, and that as hedges rolled off in 2016 companies were going to be in serious trouble. More than 40 companies filed for bankruptcy towards the end of 2015 and many analysts believe that as many as one third of all oil and gas companies could file for bankruptcy protection in 2016. On November 30, 2015 when WTI oil prices were $40 per barrel, Cherington told CNBC host Joe Kernen he believed 2016 was going to be a “really lousy” year because of the severe oversupply of global crude oil. WTI closed at $26 per barrel in February 2016. Since February, oil has made a rebound from the $20s and is now trading up near $40 per barrel again.
Intervale Capital has raised $1.3 billion of committed capital and is currently investing from its third fund. The private equity firm was founded in 2006 and invests exclusively in oilfield manufacturing and service companies.
