Hedge Funds Continue to Bet Against the Price of Oil

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By Lynn Doan

(Bloomberg) — Hedge funds raised bearish wagers on oil to an all-time high, speculating crude has further to fall as the supply glut keeps swelling.

Money managers increased short positions in West Texas Intermediate crude by 17 percent in the seven days ended Feb. 24, U.S. Commodity Futures Trading Commission data show. Net- long positions slid to the lowest in seven weeks.

Stockpiles in the U.S. have risen for seven consecutive weeks to a record 434.1 million barrels. Domestic production is continually topping weekly records, reaching 9.29 million barrels a day during the report period, while an unprecedented decline in oil drilling rigs is showing signs of slowing.

“This tidal wave of crude oil is just too overwhelming,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone Feb. 27. “There’s no end in sight.”

West Texas Intermediate crude, the U.S. benchmark, tumbled $4.25 to $49.28 a barrel on the New York Mercantile Exchange in the week covered by the report. WTI, which settled at $49.76 on Feb. 27, has lost more than half its value since reaching last year’s high in June.

U.S. crude inventories climbed 7.72 million barrels in the seven days ended Feb. 13 and jumped another 8.43 million the following week to reach 434.1 million, the most in records compiled since August 1982 by the Energy Information Administration.

Rig Count

While the number of rigs drilling for U.S. oil has fallen 39 percent since Oct. 10, the decline reported by Baker Hughes Inc. on Feb. 27 was the smallest in eight weeks and domestic crude production has continued to climb.

The EIA, the U.S. Energy Department’s statistical arm, forecast production will rise 7.8 percent to average 9.3 million barrels a day this year, the most since 1972.

“You would have to take 2 million barrels a day of production away just to get to thinking that the market is no longer oversupplied,” Michael Hiley, head of over-the-counter energy trading at LPS Partners Inc. in New York, said by phone.

The Organization of Petroleum Exporting Countries, which accounts for 40 percent of the world’s oil, has resisted calls to curb production and has no plans for an emergency meeting as prices fall, an OPEC delegate who asked not to be identified because the group’s talks are private, said on Feb. 23.

OPEC Production

Total OPEC output climbed 0.5 percent in February to 30.568 million barrels a day, the most since October, a Bloomberg survey shows.

Saudi Arabian Oil Minister Ali al-Naimi said on Feb. 25 that oil demand is rising and the market is “calm.”

Short positions in WTI increased by 17,180 contracts to 117,646 futures and options, the most in CFTC data going back to 2006. Net long positions fell 3.1 percent to 202,609, while longs gained 3.4 percent.

In other markets, net-short positions in U.S. ultra low sulfur diesel shrank 25 percent to 15,229 contracts, the least since August. Futures rose 2.6 percent to $2.0289 a gallon in the report week as freezing temperatures, refinery upsets and repairs pinched supplies.

Net-long position in gasoline fell 7.2 percent to 41,189 futures and options. Futures gained 1.9 percent to $1.6202 a gallon on Nymex in the report week.

Regular gasoline at U.S. pumps rose 1.8 cents to $2.414 a gallon on Feb. 28, the highest in more than two months, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group.

Natural Gas

Net shorts on natural gas narrowed for a second week, with contracts down 3.9 percent to 42,219. 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.

Natural gas futures gained 14.3 cents to $2.902 per million British thermal units in the week covered by the report.

Oil wagers may turn more bullish because the 7.9 percent drop in the CFTC report period came after a 7 percent gain in the previous week, Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said by phone.

“It could have just been viewed as a technical correction,” he said. “Demand is increasing, and seasonally, the market is getting close to a bottom.”

–With assistance from Naomi Christie and Grant Smith in London, Mark Shenk and Moming Zhou in New York and Vivian Nereim in Muscat.

Copyright 2015 Bloomberg.