Hedge Funds Sell Oil Fastest in 8 Months as Prices Plunge: Energy Markets

Date: Tuesday, May 25, 2010
Author: Bloomberg

Hedge funds sold oil at the fastest pace in almost eight months, cutting their bullish bets by 32 percent as crude prices plunged on concern Europe’s debt crisis will hurt energy demand.

The speculative net-long position in crude oil futures and options combined on the New York Mercantile Exchange fell to 89,335 in the week ended May 18, the biggest percentage decline since Sept. 29, according to the U.S. Commodity Futures Trading Commission’s Commitments of Traders Report on May 21.

Crude dropped 20 percent from a 19-month high of $87.15 a barrel May 3 on concern Europe will undermine a recovery from the worst recession since World War II. Supplies of oil and all petroleum-based fuels jumped to 1.81 billion barrels in the week ended May 14, the highest stockpiles on a seasonal basis based on Energy Department data back to 1990.

“Wall Street was bailing out of the market,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “The latest sell-off is confirmation that money managers are exiting. I expect next week’s report will show another significant sell-off.”

Crude oil for July delivery rose as much as 61 cents, or 0.9 percent, to $70.65 a barrel on the New York Mercantile Exchange, and was at $70.33 at 11:09 a.m. in Singapore. Today’s gain snapped a nine-day losing streak for the July contract, during which it shed 13 percent.

Gasoline Positions

In other markets, hedge funds, commodity trading advisers and commodity pool operators, classified as managed money by the CFTC, decreased net-long positions in gasoline by 16 percent to 33,157. Gasoline prices fell 15.21 cents, or 6.9 percent, to $2.0431 per gallon on the Nymex from May 11 to May 18. Since then, gasoline has fallen to $1.9612 a gallon. The price hasn’t gained since May 12.

Bullish bets on heating oil futures and options dropped 12 percent to 17,331 contracts. Heating oil for June delivery declined 8.3 percent in the week ended May 18 to $1.9615 a gallon.

The euro-area economy expanded 0.2 percent in the first quarter, faster than the 0.1 percent forecast by economists. The International Monetary Fund said last month that the region’s economy may expand only 1 percent this year, even as the Washington-based fund raised its global growth forecast for this year to 4.2 percent from 3.9 percent, citing a faster expansion in emerging economies including China.

The euro lost 12 percent against the dollar this year amid concern the Greek fiscal crisis will spread to other nations as governments work to reduce deficits.

Debt Crisis

“There is a tipping point that has occurred that would suggest that the economic recovery has lost momentum, and that the European crisis is taking the momentum out of this market,” said Peter Beutel, president of Cameron Hanover Inc., the trading adviser in New Canaan, Connecticut.

Demand growth in North America was little changed for the first three months of the year, according to preliminary figures this month from the International Energy Agency in Paris. Demand for gasoline sank to a six-week low in the week ended May 14, according to data from the Energy Department.

If hedge funds and other large speculators can push prices below so-called support at $67 to $68 a barrel, then oil may plunge as low as $60 to $62 a barrel, Schork said. If crude fails to get below $67, then prices may rebound into the mid $70s a barrel, he said.

“We know that fund managers are liquidating length,” Schork said. “The question now is will they start building up a short position and try to push this market down further.”