Hedge Funds Curb Bets on Oil Rally Just as Price Nears $70

(Bloomberg) -- Money managers curbed their enthusiasm for oil just before the U.S. benchmark price surged to almost $70 a barrel.

Total wagers on West Texas Intermediate crude slid to the lowest since early January, with bets that it will rise shrinking for a second week. That was days before Iran accused President Donald Trump of “bullying,” while the U.S. signaled it’s preparing to pull out of a nuclear accord that’s allowed OPEC’s third-largest producer to export more crude.

Hedge funds could be proven right in the longer run, though, if tensions subside and the market’s focus shifts back to abundant American supplies.

“They may have missed a little bit of a run,” said Nick Holmes, an analyst at Tortoise in Leawood, Kansas, which manages $16 billion in energy-related assets. “But if they were long over the last four to six weeks, they’ve done quite well as some of the geopolitical risk and tensions have escalated.”

Crude futures in New York have rallied more than 15 percent so far this year and money managers’ bullish stance on the benchmark is still near double the levels seen in October.

Less than two weeks before a May 12 deadline for Trump to decide on sticking to the nuclear deal or walking out, Israeli Prime Minister Benjamin Netanyahu said his country has half a ton of Iranian documents that prove Tehran had a secret program to build nuclear bombs. Yet, Iran’s foreign minister Javad Zarif said there is only one way forward: U.S. compliance with the agreement.

“This market is just solidly all bulled up,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund. That’s largely due to “geopolitical hedging.”

Amid the Iran risks, some banks are calling for higher oil prices. Bank of America Merrill Lynch expects the global Brent benchmark to exceed $80 this quarter. Some oil options traders are even betting that Brent will top $90 a barrel in the fourth quarter.

The U.S.’s take on Iran sanctions is the key price-driver, according to Standard Chartered Plc. The market has priced in more than a 50 percent probability that the U.S.’s waiver against Iran won’t be extended, but there’s still “significant upside” should the waiver lapse, the bank said.

Hedge funds reduced their WTI net-long position -- the difference between bets on a price increase and wagers on a drop -- by 3.5 percent to 418,047 futures and options during the week ended May 1, according to the U.S. Commodity Futures Trading Commission. Longs fell 3.3 percent to the lowest in four months, while shorts dipped 1.2 percent.

Aside from the world’s political woes, though, oil may have rallied a little too fast when considering the state of supplies in the U.S. American production has yet again hit a record, the nationwide oil rig count has increased for a fifth straight week and Texas oil production alone climbed to an all-time high in February.

“Rigs are increasing dramatically,” said Tariq Zahir, a commodity fund manager at Tyche Capital Advisors LLC. “Unless you have some sort of serious supply disruption, how are you going to really go from $70 to $80 and continue grinding higher from here?”

OTHER POSITIONS:

• The Brent net-long position fell 3.4 percent to 591,457 contracts, weekly ICE Futures Europe data on futures and options show.
• In the fuel market, money managers increased their net-long position on benchmark U.S. gasoline by 1.2 percent to a fresh record, while the net-bullish position on diesel jumped 1.8 percent.

To contact the reporter on this story: Jessica Summers in New York at jsummers24@bloomberg.net.

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Carlos Caminada, Jeffrey Taylor

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