Hedge Funds Increase Bullish Crude Bets to Four-Year High

Date: Tuesday, January 4, 2011
Author: Asjylyn Loder, Bloomberg

Hedge funds raised bullish bets on crude oil to the highest level in more than four years on speculation that futures will climb as the U.S. recovers from the deepest recession since the 1930s.

The funds and other large speculators increased net-long positions, or wagers on rising prices, by 4.6 percent in the seven days ended Dec. 28, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. It was the biggest total in records going back to June 2006.

Mounting evidence that demand will advance as the U.S. economy improves is boosting speculation prices may top $100 a barrel for the first time since the beginning of the financial crisis in September 2008. Global oil use will increase 1.7 percent to a record 87.8 million barrels a day this year, according to the U.S. Energy Department.

“There’s this feeling that the economy is going to get stronger, that the economic recovery is taking root, and that we’re going to see things get better,” said Peter Beutel, president of trading advisory company Cameron Hanover Inc. in New Canaan, Connecticut. “All of these are working together to push the price higher.”

Oil traded at a 27-month high yesterday, with futures for February delivery advancing 17 cents, or 0.2 percent, to $91.55 a barrel on the New York Mercantile Exchange, the highest settlement price since Oct. 3, 2008. Crude gained 15 percent in 2010. It was at $91.43 in electronic trading on Nymex at 7:02 a.m. London time today.

Climbing Prices

The most-accurate forecasters in the oil market a year ago are forecasting a second straight year of gains in 2011. Sanford C. Bernstein & Co. says crude will average $90 this year. Natixis Bleichroeder Inc., which tied with Bernstein, sees $100 a barrel, 26 percent higher than in 2010.

Oil prices will average $93 a barrel this year and are “very likely” to climb above $100, Jason Schenker, president of Prestige Economics in Austin, Texas, said yesterday in an interview with Deirdre Bolton on Bloomberg Television’s “InsideTrack.”

Futures advanced as high as $92.58 yesterday after the Institute for Supply Management’s U.S. factory index climbed to 57 in December, the fastest pace in seven months. Fuel demand increased to the highest since May 2008 in the week ended Dec. 24, Energy Department figures showed last week.

‘No Physical Tightness’

European manufacturing grew more than initially estimated in December, powered by Germany’s export-led expansion. A gauge of factory activity in the euro area rose to 57.1 from 55.3 the previous month, London-based Markit Economics said yesterday. That’s higher than the 56.8 reported earlier for December. Readings above 50 indicate expansion.

“Crude oil prices are up, and people expect them to keep going up,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “It speaks to the frame of mind that people are in more than it speaks to the underlying reality. We have no physical tightness here.”

Production will increase this year while stockpiles are already at a surplus, Evans said. Oil output will rise 0.9 percent this year, according to the Energy Department. U.S. inventories were 339.4 million barrels as of Dec. 24, 7.6 percent above the five-year seasonal norm, the department said on Dec. 30.

“The biggest downside risk here is that we encounter the same kind of profit-taking run amok that we saw last May,” Evans said.

Managed Money

Oil fell 21 percent from May 3 to May 20, when it reached a 2010 settlement low of $68.01 a barrel. From May 4 to May 25, managed money net-long positions declined 53 percent, according to CFTC data.

Net-long positions held by managed money have almost tripled since May. They rose by 9,578 futures and options combined to 217,046 the week ended Dec. 28, according to the CFTC report. The category includes hedge funds, commodity trading advisors and commodity pools.

Producers and merchants sold crude for the fourth straight week, expanding their net-short position by 2.4 percent to 177,958, the lowest since the week ended Sept. 17. The category includes oil and storage companies that may sell futures to lock in prices for future output.

In other markets, net-long positions in natural gas held by managed money, including hedge funds, commodity pools and commodity-trading advisers, in futures and options combined in four natural-gas contracts increased by 379 futures equivalents to 70,673 in the week ended Dec. 28.

The measure of net longs includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swaps, Nymex Henry Hub Penultimate Swaps and ICE Henry Hub Swaps. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.

Bullish, or long, bets on gasoline prices fell 2.8 percent to 67,205 futures and options combined, the CFTC data showed. Net-long bets on heating oil fell by 4.7 percent to 36,104.

To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net.