Oil Optimists Stay the Course Even as Demand Headwinds Loom

(Bloomberg) -- Hedge funds keep betting on an oil rally, even with prices struggling for a direction.

Investors pushed bullish wagers on West Texas Intermediate crude prices to their highest in a month and cut short-selling bets to the lowest since October, according to data released Friday. They’re apparently convinced that dwindling global supplies will be more than enough to withstand a weaker economy.

Futures in New York ended last week up by a mere 0.5 percent, with disappointing reports on U.S. jobs, Chinese exports and global economic growth clouding the outlook for energy demand. But money managers appeared to be focusing on the impact of OPEC output cuts, a pipeline explosion in Nigeria and U.S. sanctions on Iran and Venezuela.

“There probably is some expectation that something is going to force production to go lower somewhere," said Leo Mariani, a Keybanc Capital Markets Inc. analyst. That’s “fired up a little optimism in crude -- but I think we need to see some more follow-through."

Oil started this week on a more optimistic tone, with West Texas Intermediate gaining as much as 1.6 percent to $56.95 in New York trading Monday. That followed a report that Saudi Arabia plans to extend deep production cuts into April.

Oil Optimists Stay the Course Even as Demand Headwinds Loom

Net-long WTI positions -- the difference between bullish and bearish bets -- climbed by 15 percent to 151,560 options and futures contracts for the week ended March 5, according to U.S. Commodity Futures Trading Commission data released Friday. It was the first time since late December that investors had access to up-to-date positioning data. The figures had been unavailable during the U.S. government shutdown and then delayed for weeks after it ended.

Long-only bets on an increase grew by 5 percent, the most since July. Wagers on a decline were cut by 13 percent.

The picture for Brent crude, the global benchmark, was more muddled, with money mangers edging back on both bullish and bearish positions. Long-only wagers fell by 1.5 percent while short-selling bets were cut by 3.2 percent, the ICE Futures Europe exchange said.

Oil prices surged about 25 percent through mid-February, but they’ve largely moved sideways since then. The markets may not find a direction until April, as it becomes clear whether the U.S. plans to revoke waivers allowing Iranian exports to be sold, Mariani said. OPEC is also due to meet that month to determine whether to extend its production curbs.

Oil’s future is also “highly dependent" on how the ongoing U.S.-China trade war plays out, added Gene McGillian, vice president of market research at Tradition Energy.

“Until we get a clear indication of how demand growth will play out, we won’t see more conviction on things going higher," McGillian said. “We’re all watching for the new shoe to drop here."

Other Positions:

  • The net-long position on benchmark U.S. gasoline fell by 2 percent to 73,236 futures and options, according to CFTC data.
  • Diesel net-longs climbed 14 percent to 10,306 contracts, the highest since November.

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