Hedge Funds Raise Oil Bets as Prices Reach 27-Month High

Date: Monday, January 17, 2011
Author: Asjylyn Loder, Bloomberg

Hedge funds raised bullish bets on oil by the most in five weeks as crude reached the highest level in more than two years amid signs that the global economic recovery is gaining momentum.

The funds and other large speculators increased net-long positions, or wagers on rising prices, by 12 percent in the seven days ended Jan. 11, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. It was the biggest advance since the week ended Dec. 7.

Crude hit a 27-month high on Jan. 12 as Chinese customs data showed oil imports to the world’s largest energy user rose 18 percent in 2010 and the U.S. Energy Department in Washington said stockpiles declined to an 11-month low in the week ended Jan. 7. Prices also advanced as an Alaskan pipeline carrying about 11 percent of U.S. output shut because of a leak.

“The consensus is for good, solid economic growth worldwide, particularly in China and India, which are big commodity consumers,” said Kyle Cooper, director of research at IAF Advisors in Houston. “That’s driving appetite for a lot of investment in commodities like crude and copper, the building blocks of the world economy.”

Oil climbed $3.51, or 4 percent, last week to settle at $91.54 a barrel on Jan. 14 on the New York Mercantile Exchange, the biggest advance since the five days ended Dec. 3. It traded at $91.86 two days earlier, the highest level since Oct. 3, 2008. The contract was at $91.21 today, down 0.4 percent.

Net-long positions held by managed money, including hedge funds, commodity pools and commodity-trading advisers, advanced by 22,361 futures and options combined to 209,769, according to the CFTC report.

Chinese Growth

Chinese consumption of refined products will increase 4.8 percent in 2011 after climbing 11 percent in 2010, based on estimates last month from the Paris-based International Energy Agency.

The Federal Reserve said on Jan. 12 that holiday-season spending and increased manufacturing drove an economic expansion across the U.S. in November and December. Six regions, including Atlanta and Chicago, showed economies growing “modestly to moderately,” and four, among them New York and Boston, had “improving” conditions, the Fed said in its Beige Book report.

In a Jan. 14 report, the Fed said output at U.S. factories, mines and utilities increased by the most in five months.

“Each of those headlines adds to the bullish sentiment,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “The fact that we in the U.S. have overall been seeing a decline in our petroleum-product inventory in the last four to five months has contributed to that.”

Falling Reserves

Stockpiles fell 2.15 million barrels to 333.1 million the week ended Jan. 7, the lowest level since February, the Energy Department said Jan. 12. Fuel demand in the U.S. climbed 2 percent in the past year to 19 million barrels a day, the department said. Petroleum inventories have fallen 6.9 percent since reaching a 2010 in peak the week ended Sept. 17.

The Trans-Alaska pipeline shut on Jan. 8, forcing companies including BP Plc to suspend 95 percent of production from the North Slope area. The system starts in Prudhoe Bay and runs to Valdez, the northernmost ice-free port in America.

The pipeline transported an average of 641,517 barrels a day in December, according to the Alaska Department of Revenue website. U.S. production totaled 5.62 million barrels a day in October, the latest month for which figures are available from the Energy Department.

Wax and Ice

The line started temporarily on Jan. 11 to help prevent the accumulation of wax and ice inside the pipe. Alyeska Pipeline Service Co., the operator, shut it again Jan. 15 to install a bypass and plans to resume flows today.

“We’ve had some losses of production at a time when world demand has been quite good, led by heating oil and diesel fuel demand,” Lipow said.

Net-long bets on heating oil among managed money rose 10 percent the week ended Jan. 11 to 40,976, the CFTC data showed. The U.S. in December exported 882,000 barrels a day of distillate fuel, including diesel and heating oil, according to the Energy Department. Traders use heating oil as a proxy to bet on diesel.

In other markets, long bets on gasoline fell 0.2 percent to 69,251 futures and options combined, the CFTC data showed.

Gasoline, Natural Gas

Gasoline for February delivery rose 4.87 cents, or 2 percent, to settle at $2.4946 a gallon on Jan. 14, the highest since Sept. 26, 2008. It slid 0.1 percent to $2.4925 today.

Net-long positions in natural gas held by managed money in futures and options combined in four natural-gas contracts decreased by 8,987 futures equivalents to 127,955 in the week ended Jan. 11.

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.

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

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.