Oil rally finally pulls hedge fund optimists off sidelines

NET-LONGS ROSE 14% TO 266,057 FUTURES AND OPTIONS FOR THE WEEK

Oil optimists look like they’re finally ready to take the driver’s seat in crude’s rebound. For the first time this year, a jump in bets that Brent crude prices will rise far surpassed the move by short-sellers, helping set the tone for money managers’ positioning on the global benchmark. Sentiment is now the most bullish since late October.

So far, the mood had hinged mostly on what short-sellers were up to. But in the week ended February 12, bullish bets rose by 10 per cent, the most since late August, according to data released on Friday. Wagers on falling prices shrank by 5.5 per cent.

“Many of the worries we’ve had about demand have dissipated,’ said Bart Melek, head commodities strategist at TD Securities in Toronto, said in an interview. “That’s convinced people to strap on some risk again.’

After surging 15 per cent in January’s first ten days, Brent slipped into neutral for more than a month, weighed down by worries over the US-China trade war and record US production. The rally reignited last week after Saudi Arabia and Russia both pledged to expand cuts to their crude output. The S&P 500 joined in, hitting a 10-week high on Friday after reports American and Chinese negotiators had reached a consensus.

Oil resumed its rally last week — taking its advance this year to about 22 per cent — after Saudi Arabia announced it would cut supply even further than agreed under a deal with fellow members of the Organisation of Petroleum Exporting Countries and its allies. Russia pledged to make good on its cuts after trailing behind Opec members. With mounting signs of production cuts by Opec and other top exporters, crude shrugged off more pessimistic signs, including surprisingly weak retail sales and a dip in refinery activity in the US.

That was partly due to “speculators pushing the upside,” said Bob Yawger, director of futures at Mizuho Securities USA.

Gains

Net-longs — the difference between bullish and bearish bets on Brent — climbed 14 per cent to 266,057 futures and options for the week ended February 12, the ICE Futures Europe exchange said on Friday.

Last week’s gains may convince computer-driven traders who make up about a third of the market to liquidate even more of their short bets, said TD’s Melek.

Brent passed a series of price thresholds last week that, based on an analysis of past trading, are likely to trigger more aggressive moves ahead, the strategist said in a note to clients Friday.

The latest information on WTI positioning won’t be available until next month, as the US. Commodity Futures Trading Commission is still releasing older data following the government shutdown.