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Hedge Funds Cut Bullish Bets on Crude as Prices Tumble

Date: Tuesday, October 21, 2014
Author: Mark Shenk, Bloomberg

Plunging oil prices spurred hedge funds to cut bullish wagers by the most in six weeks, losing confidence in the willingness of producers to constrict supply.

Money managers cut net-long positions in West Texas Intermediate by 8.1 percent in the week ended Oct. 14. Short positions jumped to the highest level in 22 months, U.S. Commodity Futures Trading Commission data show.

WTI tumbled 8.8 percent this month as U.S. production expanded to a 29-year high. That added to signs of a global supply glut just as the International Energy Agency cut its forecast for demand growth. Crude is now trading in a bear market, underpinned by speculation that OPEC members are favoring market share over prices.

“The price action this week is a reflection of the positioning,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone Oct. 17. The speculative betting makes further declines more likely, he said.

WTI fell $7.01, or 7.9 percent, to $81.84 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. Futures dropped 7 cents to $82.68 at 2:08 p.m. on the New York Mercantile Exchange today.

Global crude consumption will rise by about 650,000 barrels a day this year, the Paris-based IEA said in its monthly market report on Oct. 14. That was 250,000 fewer than last month’s estimate and the slowest growth since 2009. The adviser to energy-consuming countries cut its 2015 demand growth forecast by 100,000 barrels a day to 1.1 million.

OPEC Production

U.S. crude output reached 8.95 million barrels a day in the week ended Oct. 10, the most since June 1985. Production will climb to 9.5 million next year, the most since 1970, the Energy Information Administration said in its monthly Short-Term Energy Outlook on Oct. 7.

The Organization of Petroleum Exporting Countries pumped 30.935 million barrels a day in September, the highest since August 2013, led by surging output from Libya, a Bloomberg survey of oil companies, producers and analysts showed.

Bank of America Corp. and BNP Paribas SA predict prices will hold above $80 a barrel and Goldman Sachs Group Inc. said that the drop in crude was excessive because there’s no oversupply.

Price Outlook

Goldman Sachs is “near-term constructive about prices” after they fell too much, too soon, analysts including Jeffrey Currie, the head of commodities research in New York, wrote in a report e-mailed Oct. 17.

“It looks like we’ve seen the peak in downside momentum and the peak of the fear factor,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone on Oct 17. “That doesn’t mean we can’t fall anymore. Prices may grind lower and test $80 again rather than plunging to new lows.”

Net-longs for WTI declined by 15,537 to 176,671 futures and options combined during the week ended Oct. 14, the least since the period ended Sept. 2. Shorts climbed 12,617 to 86,650. Long positions slipped 2,920 to 263,321.

“The data reflects Tuesday, when prices were down sharply,” Evans said. “This was an exceptional period. This report should be an interesting benchmark going forward.”

In other markets, bullish bets on gasoline increased 18 percent to 23,969 futures and options, the highest level in two months. Futures declined 7.9 percent to $2.1802 a gallon on Nymex in the reporting period.

Pump Price

Regular gasoline at the pump, averaged nationwide, slid 1.3 cents to $3.1 a gallon yesterday, the lowest since Jan. 30, 2011, according to Heathrow, Florida-based AAA, the largest U.S. motoring group.

Bearish wagers on U.S. ultra low sulfur diesel increased 13 percent to 34,470 contracts. The fuel decreased by 5.2 percent to $2.4722 a gallon in the report week.

Net-long wagers on U.S. natural gas dropped 18 percent to 68,609 contracts, the lowest since January 2013. 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 fell 14.1 cents, or 3.6 percent, to $3.816 per million British thermal units during the report week.

Crude prices may increase as U.S. refinery activity climbs in the weeks ahead, said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Refineries operated at 88.1 percent of their capacity in the week ended Oct. 10, the lowest level since June, according to EIA data. Refiners schedule maintenance for September and October as they transition to winter from summer fuels.

“The market has found an area of support around $80,” Schork said by phone on Oct. 17. “With so many people going short and the turnaround season soon coming, I think this is a good time to buy.”