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Hedge Funds Buy Oil as Supply Drops Before Memorial Day

Date: Monday, May 26, 2014
Author: Moming Zhou, Bloomberg

U.S. crude inventories declining from a record before the Memorial Day weekend spurred speculators to increase bullish bets on oil for a second week.

Hedge funds raised their net-long position in benchmark West Texas Intermediate futures by 4.1 percent in the week ended May 20, U.S. Commodity Futures Trading Commission data show. Prices climbed to a one-month high.

Crude supplies fell the most in four months in the week ended May 16, the U.S. Energy Information Administration said. Refineries produced a record amount of gasoline before the holiday, the start of the summer driving season. AAA, the largest U.S. motoring group, expects it to be the busiest weekend since 2005. Today is Memorial Day in the U.S.

“The decline in crude stocks, particularly after weeks and weeks of build, gave the impetus higher to WTI prices,” Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy, said by phone on May 23. “The market chose to focus on the inventory figure for crude.”

WTI futures gained 74 cents to $102.44 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. They settled at $102.61 on May 19, the highest since April 21. Prices advanced 61 cents to $104.35 on May 23. The contract fell 0.3 percent today.

Oil Inventories

U.S. crude supplies decreased 7.23 million barrels in the week ended May 16 to 391.3 million, the biggest decline since Jan. 10, according to the EIA. Stockpiles reached a record 399.4 million on April 25.

The drop came as imports fell and refineries used 15.9 million barrels a day of crude, up for the first time in four weeks. Gasoline production reached 9.59 million barrels a day, the highest seasonal level in EIA data starting in 1982.

Rising demand from refineries reduced supplies in the Gulf Coast region, known as PADD 3, where more than half of U.S. refining capacity is located, to a one-month low.

“People are expecting continued declines in U.S. crude oil inventories because of high refinery runs to meet gasoline demand.” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone on May 23. “Travel on the holiday weekend is going to be up and that makes it more bullish for oil.”

Holiday Travel

AAA, based in Heathrow, Florida, said May 16 it expects 31.8 million people to travel 50 miles or more by car over the holiday weekend.

Gasoline demand increased to 9.19 million barrels a day in the week ended May 9, the most since Nov. 1, EIA data showed. Consumption was 9.17 million in the seven days ended May 16.

In other markets, net longs on U.S. natural gas slid 11,106 to 340,011. 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.

Nymex natural gas rose 19.4 cents, or 4.5 percent, to $4.552 per million British thermal units during the report week.

Money managers’ bullish wagers on U.S. ultra-low-sulfur diesel gained 3,436 to 28,410. The fuel climbed by 0.52 cent to $2.9492 a gallon in the report week.

Bullish bets on gasoline fell 1,904 to 58,819 futures and options. Futures gained 3.38 cents, or 1.2 percent, to $2.964 a gallon on Nymex in the reporting period.

Pump Prices

Regular gasoline at the pump rose to $3.656 a gallon nationwide on May 22, the highest level since May 9, according to AAA. The fuel will average $3.58 from Memorial Day to Labor Day, the same as last year and 3 cents higher than in 2012.

Prices may drop about 15 cents after the holiday through the end of June as production outpaces demand, Michael Green, a spokesman for the AAA in Washington, said by phone on May 22.

Hedge funds and other money managers raised net-long positions in WTI by 12,798 to 323,993 futures and options in the week ended May 16, the biggest gain since April 8, the CFTC reported. Long positions rose 13,110 and shorts grew 312.

“Inventories were a big part of what’s happening,” Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said by phone May 23. “It’s been a long winter and people want to get out, so demand is going to be pretty good.”

To contact the reporter on this story: Moming Zhou in New York at mzhou29@bloomberg.net

To contact the editors responsible for this story: Dan Stets at dstets@bloomberg.net Lars Paulsson, Andrew Reierson