The funds and other large speculators reduced net-long positions, or wagers on gains, by 18 percent in the seven days ended Jan. 25, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. That turned into a losing bet as prices surged at the end of the week.
Oil jumped 4.3 percent Jan. 28, erasing the week’s losses, as protesters called for the end of the 30-year rule of President Hosni Mubarak, sparking speculation of more turmoil in the region. The volume of oil futures traded on the New York Mercantile Exchange rose to a record 1.47 million. Shares in the $1.8 billion U.S. Oil Fund, the largest exchange-traded fund in the fuel, hit an eight-month high.
“The people who were selling earlier in the week obviously lost,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “There are a lot of black swan moments that send the market jumping one way or the other very suddenly, wiping out any gains.”
Oil for March delivery increased $3.70 to $89.34 a barrel on the Nymex on Jan. 28. It was the largest increase since Sept. 30, 2009, and overcame what had been a 3.9 percent loss for the week. Futures advanced $2.85, or 3.2 percent, to $92.19 today, the highest settlement price since Oct. 3, 2008.
“A lot of people expect the market to tighten this year but it hasn’t done so yet,” Lynch said. “Inventories have increased in the last few weeks. That left people feeling like the market had gotten ahead of itself.”
Brent crude, used to price two-thirds of the world’s oil supply, rose above $100 a barrel for the first time since Oct. 1, 2008. The March Brent contract advanced $1.59, or 1.6 percent, to settle $101.01 a barrel on London’s ICE Futures Europe exchange, the highest settlement since Sept. 26, 2008. The contract reached $101.73 in intraday trading.
Hedge fund managers who raised bets oil would fall got blindsided, Lynch said, referring to the title of the 2007 best- seller by Nassim Taleb. In “The Black Swan: The Impact of the Highly Improbable,” Taleb argues that history is littered with rare, high-impact events that can roil markets. The theory stems from the ancient misconception that all swans were white.
Net-Long Positions Fall
Net-long positions in oil held by managed money fell by 38,551 futures and options combined to 172,013, according to the CFTC report. It was the lowest level since the seven days ended Nov. 30. The category includes hedge funds, commodity pools and commodity-trading advisers.
Oil volume on the Nymex climbed to a record 1.47 million contracts on Jan. 28. That beat the previous record of 1.42 million, set April 13, according to an e-mailed statement from Nymex parent CME Group.
Volume in the U.S. Oil ETF reached 30.2 million shares, the highest level since May 20, in composite trading on the New York Stock Exchange. Trading of bullish options on the fund soared to a record, with almost 242,000 calls to buy changing hands, seven times the four-week average and almost five times the number of puts to sell.
The protests in Egypt raised concern that unrest would spread to oil-producing nations in the Middle East. Demonstrators clashed with police in several cities following the uprising that led to the Jan. 14 overthrow of Tunisian President Zine El Abidine Ben Ali.
The anti-Mubarak movement, backed by former United Nations nuclear official Mohamed ElBaradei and the Muslim Brotherhood, aims to hold a 1-million-person march in Cairo tomorrow to demand the resignation of the 82-year-old ruler, said Mahmoud El-Said, one of the organizers. It would be the biggest demonstration in a week-long uprising that has left as many as 150 dead and sent markets tumbling worldwide.
Middle East shares dropped yesterday, sending Dubai’s index down the most in eight months. It extended the decline by 0.6 percent today. Egypt’s market was closed yesterday and today after sliding 16 percent last week. Saudi Arabia’s Tadawul All Share Index retreated 1 percent.
Egypt controls the Suez Canal connecting the Mediterranean and Red Sea. Between 1 million and 1.6 million barrels a day of oil and refined products moved to Europe and other developed economies in 2008 and 2009, according to the Energy Department which identified the passage as one of seven “world oil transit chokepoints” in a report earlier this month.
The violence led traders to ask “bullish what-if questions about geopolitical risk,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. If protests subside, attention will return to oil supplies, he said.
U.S. supplies climbed 4.84 million barrels to 340.6 million the week ended Jan. 21, the Energy Department reported last week. Inventories were forecast to climb by 1.2 million barrels, according to a Bloomberg News survey.
In other markets, net-long positions in natural gas held by managed money in futures and options combined in four natural- gas contracts increased by 31,415 futures equivalents to 142,901 in the week ended Jan. 25. It was the highest since the week ended June 29.
The measure of net longs includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swaps, Nymex Henry Hub Penultimate Swaps and ICE Henry Hub Swaps. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.
Bullish, or long, bets on gasoline prices declined 7.3 percent to 61,733 futures and options combined, the CFTC data showed. It was the largest drop since the week ended Oct. 26. Net-long bets on heating oil fell 5.9 percent to 35,934.
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