No Trump Bump on Iran as Hedge Funds Stay Cautious on Oil Boost

(Bloomberg) -- President Donald Trump’s reintroduction of U.S. sanctions on Iran didn’t impress money managers who reduced their bullish oil bets in the week leading up to the announcement.

Trump’s May 8 statement that the U.S. will quit the Iran pact and boost sanctions against OPEC’s third-largest producer turned out to be anticlimatic. Oil prices, which surged to a three-year high in anticipation of the new sanctions, moved very little the rest of the week. As prices stabilized, hedge fund wagers on further gains fell to the lowest in four months.

While Trump’s decision could tighten a market depleted by OPEC output cuts and Venezuela supply losses, mitigating factors -- including a rising U.S. rig count -- could hold off a significant price boost.

“The two things that would shift the market in a bearish direction is if the Saudis or Kuwaitis say we are going to offset lost Iranian supply, or if major buyers in Europe say they will ignore the decision and continue buying” Iranian crude, said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

Hedge funds reduced their WTI net-long position -- the difference between bets on a price increase and wagers on a drop -- by 1.8 percent to 410,608 futures and options during the week ended May 8, according to the U.S. Commodity Futures Trading Commission. Longs fell by 14,535 contacts, while shorts dipped by 7,096.

The CFTC data shrugs off a report by Bank of America Corp. that sees oil prices rallying to $100 a barrel next year, a level not seen since 2014, as supply risks in Venezuela and Iran strain global markets.

While Trump has reinstated U.S. sanctions, it will “take time before it comes into effect,” said James Williams, president of London, Arkansas-based energy researcher WTRG Economics. “And it is uncertain about Europe’s participation, so there may not be as much impact to Iranian exports as anticipated."

Aside from the Iran decision, money managers may believe oil rallied a little too fast, at a time when U.S. working oil rigs are multiplying. The number of rigs are up by 10 this week to 844, the highest since March 2015. It’s the sixth straight week the nationwide oil rig count has increased.

“The rig count moves tend to lag oil & gas price inflections by 3-4 months, suggesting that the current demand run-rate does not fully reflect the recent crude price rally,” Morgan Stanley analysts wrote in a note to clients on Friday. “This implies that we could see another 70+ rigs added market-wide by year end.”

Brent futures, the global benchmark, traded near $77 a barrel on Friday. Oil traders will be watching prices near a key psychological threshold as Brent contracts in London approach $80 a barrel for the first time since 2014.

It’s more than a round number: $80 is the level that Saudi Arabia has privately signaled it desires, as the kingdom seeks to cover weighty domestic spending needs and burnish the appeal of its potential Saudi Aramco IPO.

OTHER POSITIONS:

• The Brent net-long position fell 3.7 percent to 569,448 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 0.7 percent, while the net-bullish position on diesel jumped 9.7 percent.

To contact the reporters on this story: Robert Tuttle in Calgary at rtuttle@bloomberg.net, Sheela Tobben in New York at vtobben@bloomberg.net.

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Reg Gale

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