Extracted crude oil splashes on a worker’s hand as it’s being pours from a pipe in the village of Wonocolo, East Java, Indonesia. (Dimas Ardian/Bloomberg)

Oil Drop Below $80 Vindicates Cautious Investors Trimming Bets

(Bloomberg) -- Money managers’ reluctance to get behind the oil rally is finally paying off.

Hedge funds trimmed their net-long position -- the difference between bets on a price increase and wagers on a drop -- in Brent crude by the most in almost a year. The cuts came as the global benchmark capped its first weekly drop since early April, sliding below $80 a barrel after Saudi Arabia and Russia said OPEC and its allies may boost oil output in the second half of the year.

“Traders thought that the market was in the process of topping out,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by telephone Friday. Oil prices had a “swift reaction today to the musings by OPEC to potentially add more supply to the market. We will be very headline-driven over the next few weeks.”

Oil retreated from the highest prices in almost four years as Russian and Saudi energy ministers signaled that the coalition led by the Organization of Petroleum Exporting Countries may gradually raise oil production to assuage consumer anxiety about higher prices. Their comments mark a major shift in strategy for the historic alliance forged in 2016 to erase a global crude glut.

“I think in the near future there will be time to release supply” smoothly to avoid shocking the market, Saudi Energy Minister Khalid Al-Falih said at the St. Petersburg International Economic Forum in Russia. When OPEC, Russia and other major producers meet in June “we will do what is necessary” to reassure buyers, the minister said.

He spoke after talks with his Russian counterpart Alexander Novak, who said the output boost would start in the third quarter, if it’s approved by other members of the group. Both men said the size of the increase was still subject to negotiation.

Hedge funds lowered their Brent net-long position by 8.6 percent in the week ended May 22 to 501,634 contracts, according to ICE Futures Europe data on futures and options released Friday. That was the biggest decline since June 2017.

Money managers’ net-long position in West Texas Intermediate crude fell by 2 percent to 377,520 futures and options, the lowest since November, according to U.S. Commodity Futures Trading Commission released Friday. Longs slipped less than 0.1 percent, while shorts climbed 23 percent, the biggest jump since April.

“You want to get out of the long positions if you are expecting that OPEC is going to increase production,” James Williams, president of London, Arkansas-based energy researcher WTRG Economics, said by phone. “It makes perfect sense for the folks that are long to say, ‘How much longer can this thing continue to grow?’”

Disruption Threat

Crude had rallied earlier this month on the dual threat of supply disruptions from Iran and Venezuela, which together account for about 14 percent of OPEC’s production. Still, the coalition is weighing the possibility of easing output limits at a time when drillers are pumping record amounts of crude from American shale basins.

“The market kind of overextended itself, ” Gene McGillian, manager of market research for Tradition Energy in Stamford, Connecticut, said by phone. “With the Saudis now saying they’re limiting their production cuts and geopolitical risk already priced in, there is going to be some uncertainty.”

A dearth of pipelines in West Texas’ Permian Basin, the most prolific U.S. oil play, is leaving supplies trapped in the region. That’s expanding the nation’s surplus of the fuel as American production tops 10 million barrels a day.

U.S. inventories climbed by 5.78 million barrels to about 438 million barrels in the week ended May 18, data from the Energy Information Administration showed. That was a surprise increase compared with the 2 million-barrel decline predicted in a Bloomberg survey.

But analysts and traders predict that stockpiles may decline in the coming weeks, bolstering prices. Data provider Genscape Inc. was said to report that inventories fell by about 475,000 barrels between May 18 and May 22 at the key pipeline hub in Cushing, Oklahoma.

Oil prices have “been extremely extended for a long period of time,” Kyle Cooper, a consultant at brokerage Ion Energy Group LLC, said by phone Friday. The “EIA report was bearish with a nearly 6 million-barrel build in total petroleum. The more important thing is how that was followed up today with OPEC and Russia regarding the possibility of removing some of those supply constraints.”

OTHER POSITIONS:

  • In the fuel market, money managers boosted their net-long position in benchmark U.S. gasoline by 6.3 percent, rising for a sixth straight week
  • The net-bullish position on diesel gained 0.3 percent to the highest since January

©2018 Bloomberg L.P.

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