Bets on Opec rally are gone, that may be good for crude
new york — Hedge funds have undone all their wagers on an Opecdriven oil rally, and that could be good for prices.
Bets on West Texas Intermediate futures have all gone back to where they were before Opec agreed to cut output, data from the US Commodity Futures Trading Commission show. The silver lining is that this is how money managers lay the groundwork for a rebound, and the steady drop in US supplies may be just the fodder optimists needed to start anew.
“There’s now fresh ammunition ready to reenter the market,” John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy, said by telephone. “A huge shakeout invites a rally.”
That turnaround might already have started. Crude had its best week since March after stubbornly high US stockpiles fell the most this year, giving hope to investors searching for signs that a global glut is easing. It was the fifth straight decline, and it was accompanied by drops in gasoline and distillate fuel inventories.
“We should continue to have crude draws, the last one was profound,” Jay Hatfield, a New York-based portfolio manager at the InfraCap MLP exchange-traded fund with $375 million in assets, said by telephone. “There will be a lot of attention paid to US stockpiles in the weeks ahead.”
WTI on Monday jumped as much as 2.8 per cent to $49.20 a barrel, the highest in almost two weeks, after Saudi Arabia and Russia said they favour extending oil-output cuts by global producers through the first quarter of 2018. The rebound follows a rout that wiped out all the gains from the past five months amid growing signs that production cuts by the Organisation of Petroleum Exporting Countries and its allies have failed to rebalance the market.
Sceptics will be keeping an eye on rising US output, which reached 9.3 million barrels a day in the week ended May 5, the highest since April 2015, according to the Energy Information Administration. Output is poised to climb further in the months ahead as US explorers stage the longest drilling ramp-up since 2011.
Money managers’ WTI net-long position tumbled 17 per cent to 168,814 futures and options in the week ended May 9, according to the CFTC. That was the lowest since November. Longs, which had already slumped to pre-Opec deal levels a week earlier, edged up 2.1 per cent. Shorts jumped 37 per cent and have tripled since the end of February.
While the surge in bets on declining prices reflects a loss of faith in Opec’s ability to rebalance the market, it also paves the way for a rebound when positive news like the US stockpiles slump rekindles optimism. That’s because at some point short-sellers need to go on a buying spree called short-covering to return securities they borrowed and sold. The coming weeks will tell if that’s what’s happening.
“One thing to keep in mind while you look at these numbers is that more selling now, means more potential buying later,” Tim Evans, an analyst at Citi Futures Perspective in New York, said by telephone. —