Oil Bulls Get Back in the Game as Supply Risks Rattle Market

(Bloomberg) -- Oil bulls are venturing back into the market as global conflict sparks concern that supply disruptions will leave buyers scrambling for barrels.

Money managers boosted their net-long position -- the difference between bets on rising prices and wagers on a decline -- in Brent crude by 4.1 percent after cutting them the most since 2016 a week earlier.

Geopolitical tensions have roiled the crude market, sending Brent prices higher since mid-July as global supplies tighten. U.S. plans to reimpose sanctions on Iran may sharply curtail the nation’s oil exports, stoking concern that OPEC won’t have enough spare capacity to meet rising demand. Saudi Arabia, meanwhile, temporarily halted shipments via a key Red Sea shipping lane after it said two tankers were attached by Yemen’s Houthi militia.

“The risk premium for Brent is definitely on right now given the war of words we’ve seen against Iran -- in general, political instability,” said Ashley Petersen, lead oil analyst at Stratas Advisors in New York. “I don’t think markets are expecting that to get any better anytime soon.”

Iran has renewed threats to block the Strait of Hormuz since the U.S. announced its plan to reinstate sanctions and cut shipments from OPEC’s third-largest producer to zero from about 2.5 million barrels a day now. U.S. efforts to cut Iran’s oil exports are expected to contribute to global oil price volatility in the short term, according to the International Energy Agency.

And concern persists that there won’t be enough spare OPEC capacity to make up for losses from producers like Venezuela.

The Brent net-long position rose to 367,640 contracts, the first gain in three weeks, ICE Futures Europe data show.

“It lines up with our call to buy the dip in July,” said Chris Kettenmann, chief energy strategist at Macro Risk Advisors LLC. “We’ve been pretty vocal about adding to length through the July sell-off.”

Oil’s Bull Trend

Goldman Sachs Group Inc. said while U.S. policies may weigh on crude prices in the near term, prices are poised to re-test $80 a barrel later this year.

“OPEC could bring back 1 million barrels a day, but any barrels brought back by Saudi, Russia, Kuwait, those might just offset barrels lost from Iranian sanctions,” said Noah Barrett, an energy research analyst at Janus Henderson Investors. Due to bottlenecks in the Permian Basin, “U.S. production will continue to grow, but it probably won’t exceed expectations. It’s more likely it will disappoint to the downside.”

Though a shortage of pipelines persists in the Permian Basin of West Texas and New Mexico, domestic crude production is hovering near a record 11 million barrels a day, according to the latest Energy Information Administration data.

Hedge funds’ net-long position in West Texas Intermediate crude fell 2.4 percent to 392,147 futures and options during the week ended July 24, according to the U.S. Commodity Futures Trading Commission. Longs fell and shorts rose.

“There’s just kind of an acknowledgment that there is still a lot of supply in Texas, so it’s not clear sailing for prices,” Petersen said.

Total positioning on the U.S. benchmark and Brent slid to the lowest level since 2016.

The reduction in participation shows that “the summer-time doldrums are here and there’s not a lot of direction for this market at the moment,” said John Kilduff, a partner at New York-based hedge fund Again Capital LLC.

OTHER POSITIONS:

• Money managers increased their net-long position on benchmark U.S. gasoline by 14 percent.
• Hedge funds boosted their net-bullish position on diesel by 28 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, Christine Buurma, Catherine Traywick

©2018 Bloomberg L.P.