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Hedge Funds Racing Oil Refiners to $100 a Barrel: Energy Markets

Date: Tuesday, February 5, 2013
Author: Asjylyn Loder, Bloomberg

Hedge funds and refiners vied to buy oil futures last month, pushing crude to the highest level since September, as the U.S. added jobs and expanded manufacturing while the government said fuel demand will rebound this year.

Money managers increased net-long positions, or wagers on rising U.S. prices, to a nine-month high of 218,604 in the week ended Jan. 29, according to the Commodity Futures Trading Commission’s Feb. 1 Commitments of Traders report. It was their seventh week of increasing bullish positions, the longest run of gains in records dating back to June 2006.

Oil climbed for an eighth week, the longest stretch of weekly advances since 2004, on signs that economic growth is accelerating. Bullish wagers held by refiners and producers advanced for a fifth week to the most since at least June 2006. The Energy Information Administration said that petroleum consumption will rise in 2013 for the first time in three years.

“It looks like we’re headed for $100, if not higher, which is getting the attention of both investors and commercial market participants,” John Kilduff, a partner at Again Capital LLC, a New York-based energy hedge fund, said by phone Feb. 1, referring to U.S. crude. “There’s been a lot of positive economic news, supply jitters and a cutback in OPEC production.”

West Texas Intermediate, the U.S. benchmark, advanced $1.33 a barrel, or 1.4 percent, to $97.57 on the New York Mercantile Exchange in the week covered by the report. WTI fell 1.2 percent to $96.59 a barrel as of 10:19 a.m. in New York.

OPEC Cutback

WTI oil gained 6.2 percent in January as positive economic news bolstered demand forecasts, while the Organization of Petroleum Exporting Countries cut output. Geopolitical unrest including an attack on a gas plant in Algeria and civil war in Syria spurred concern that there may be supply disruptions in North Africa and the Middle East.

Producers, merchants, processors and users switched to bullish wagers last month after a bearish stretch dating back to at least June 2006 that saw selling by producers outweigh buying by refiners and other commercial users. The category increased net-long positions by 271 futures and options combined, or 2.6 percent, to 10,840, the latest report showed.

“There’s been a significant rally since mid-December,” Kilduff said. “The commercials have to cover their vulnerabilities to what is now clearly a bullish market.”

Oil Demand

U.S. petroleum consumption will rise to 18.71 million barrels a day in 2013 from 18.65 million last year, the EIA, an arm of the U.S. Energy Department, said in its Jan. 8 Short-Term Energy Outlook.

OPEC reduced production by 525,000 barrels a day, or 1.7 percent, in January to 30.5 million, the lowest level since October 2011, according to a Bloomberg survey of oil companies, producers and analysts.

“While the positive economic sentiment has provided a strong base for this shift upward in prices, the sensitivity of the oil markets to the multitude of geopolitical events has left a greater impression over the past week,” Miswin Mahesh, an analyst at Barclays Plc in London, said in a Feb. 1 note to clients.

Futures gained 0.7 percent on Jan. 22 as German investor confidence climbed more than economists expected. Germany’s ZEW Center for European Economic Research said its index of investor and analyst forecasts rose to 31.5, from 6.9 a month earlier.

WTI gained 0.8 percent on Jan. 24 after the Labor Department said that applications for unemployment insurance fell by 5,000 to 330,000 in the week ended Jan. 19, the fewest in five years. In addition, the Conference Board’s measure of the outlook for the next three to six months advanced by 0.5 percent, the New York-based group said.

Chinese Manufacturing

Manufacturing in China also expanded. The preliminary reading of a Purchasing Managers’ Index was 51.9 in January, according to a Jan. 24 statement from HSBC Holdings Plc and Markit Economics. That compares with the 51.5 final reading for December and the 51.7 median estimate in a Bloomberg survey.

The U.S. accounted for 21 percent of the world’s oil consumption in 2011, according to BP Plc (BP/)’s Statistical Review of World Energy. China, the second-biggest crude-consuming country, was responsible for 11 percent of global demand, while Germany used 2.7 percent.

Oil advanced to a four-month high on Jan. 28 after the Commerce Department reported that U.S. orders for durable goods had increased 4.6 percent in December. It was the first gain since September, the data show.

Futures leapt again on Jan. 29 after home prices in 20 U.S. cities climbed by the most in more than six years. The S&P/Case- Shiller index of property values climbed 5.5 percent in November from the same month in 2011, the biggest year-over-year gain since August 2006.

Federal Reserve

Crude rose to $97.94 a barrel on Jan. 30 after the Federal Reserve maintained its asset-buying program to bolster the economy. The Fed said at the end of a two-day meeting that it will keep purchasing securities at the rate of $85 billion a month. It was the highest price since Sept. 14.

WTI futures capped the longest stretch of weekly gains in more than eight years on Feb. 1 after the Labor Department said that payrolls gained by 157,000 in January, and the Institute for Supply Management’s factory index reached a nine-month high.

Net-long positions in WTI held by money managers, including hedge funds, commodity pools and commodity-trading advisers, jumped by 12,701 futures and options combined, or 6.2 percent, the CFTC report showed.

Oil Trade Flow

“We are getting more overbought,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone Feb. 1. “The trade flow may continue, but there’s a considerable contrast between accumulated long positions of WTI oil futures and options and the market fundamentals.”

An oil boom in states including Texas, Oklahoma and North Dakota has been flowing into storage. Inventories gained 5.9 million barrels in the week ended Jan. 25 to 369.1 million barrels, the EIA reported last week.

America’s oil production averaged 6.993 million barrels a day in the week ended Jan. 25, according to the EIA. Rising oil and natural gas output helped the U.S. meet 84 percent of its energy needs in the first 10 months of last year, on pace to be the highest annual level since 1991, government data show.

In London, hedge funds and other money managers raised bullish bets on Brent crude to 179,735 contracts, the highest level in two years, according to weekly data released today by ICE Futures Europe.

Gasoline Wagers

Hedge funds and other large speculators also increased bullish U.S. gasoline wagers, adding 7,523 futures and options combined, or 9.9 percent, to reach 83,915, the highest since Oct. 16, according to CFTC data.

Gasoline futures gained 14.35 cents a gallon, or 5.1 percent, to $2.9734 in the week covered by the report before rising to $3.0536 on Feb. 1, the highest since Sept. 28. Futures declined 0.9 percent to $3.0256 as of 10:20 a.m. in New York.

Regular gasoline at the pump, averaged nationwide, advanced for a 18th consecutive day to $3.523 a gallon yesterday, according to Heathrow, Florida-based AAA, the largest U.S. motoring group. It was the highest price since Oct. 29.

Money managers raised bets on U.S. heating oil by 4,337 futures and options combined, or 15 percent, to 33,427, the CFTC report showed. Futures gained 1.3 percent to $3.1092 a gallon in the week covered by the report and settled at $3.1606 on Feb. 1. The fuel declined 0.2 percent to $3.1551 as of 10:22 a.m. in New York today.

Net-long wagers on four U.S. natural gas contracts advanced by 6,777 futures equivalents, or 5.7 percent, to 126,798 in the week ended Jan. 29, according to the CFTC data. It was the highest level since the week ended Nov. 27.

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

Natural gas fell 33.2 cents, or 9.3 percent, to $3.226 per million British thermal units on the New York Mercantile Exchange in the week covered by the report. The fuel advanced 2.3 percent to settle at $3.301 on Feb. 1. Futures rose 0.8 percent to $3.328 as of 10:22 a.m. today.