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Hedge Fund Bullish Oil Wagers Drop as Fuel Supply Gains: Energy

Photographer: Daniel Acker/Bloomberg

Inspectors take measurements after an approximately one-mile long string of pipeline was lowered into a trench during construction of the Flanagan South crude oil pipeline outside Goodfield, Illinois. Close

Inspectors take measurements after an approximately one-mile long string of pipeline... Read More

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Photographer: Daniel Acker/Bloomberg

Inspectors take measurements after an approximately one-mile long string of pipeline was lowered into a trench during construction of the Flanagan South crude oil pipeline outside Goodfield, Illinois.

Hedge funds became less bullish on crude oil for the first time in six weeks as U.S. inventories of fuel expanded at a time of weakening demand.

Money managers cut net-long positions, or wagers on rising prices, for benchmark West Texas Intermediate crude by 8.6 percent in the week ended Jan. 7, U.S. Commodity Futures Trading Commission data show. It was the biggest decline since June. Short positions gained the most since April.

Crude fell to an eight-month low on Jan. 9, propelled by rising U.S. supplies of gasoline, diesel and heating oil. Fuel demand dropped in the three weeks ended Jan. 3, the longest stretch of losses since June 2012 and domestic crude production rose to the highest level since 1988, according to the U.S. Energy Information Administration.

“At the end of last year there was a big run-up in prices that was impossible to maintain after the huge builds in product inventories,” said Phil Flynn, a senior market analyst at Price Futures Group in Chicago. “The overall market is very well supplied right now.”

WTI crude slipped $4.75, or 4.8 percent, to $93.67 a barrel on the New York Mercantile Exchange in the report week. Prices have since dropped further. Futures slipped 92 cents, or 1 percent, to settle at $91.80 today. They reached $100.75 on Dec. 27, the highest intraday price since Oct. 21.

“The speculators shorted the market as prices fell,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “We may see more of a drop in net-longs before this move runs out of steam.”

Fed Speculation

Futures began the reporting period by tumbling 3 percent to $95.44 on Jan. 2, the biggest decline in almost 14 months, as an improving U.S. economy added to speculation that the Federal Reserve will further curb stimulus.

U.S. jobless claims dropped and manufacturing expanded, data released that day showed. The Fed is watching those areas as it decides how quickly to reduce bond purchases meant to boost economic growth. Oil also slipped as the dollar gained against the euro and equities retreated from record highs.

WTI tumbled 1.6 percent to $93.96 on Jan. 3, capping the biggest weekly decline in 19 months, after an EIA report showed that U.S. fuel supplies rose in the week ended Dec. 27. Stockpiles of distillate fuel, a category that includes heating oil and diesel, increased 5.04 million barrels to 119.1 million. Gasoline stockpiles gained 844,000 barrels to 220.7 million. Fuel use fell 7.2 percent, the most since January 2012.

Crude Output

U.S. crude output rose 10,000 barrels to 8.12 million a day, according to the report. Production surged to the most since September 1988 as the combination of horizontal drilling and hydraulic fracturing unlocked supplies trapped in shale formations. Output gained another 24,000 barrels a day to 8.15 million a week later, also the most since 1988.

Futures dropped 0.6 percent to $93.43 on Jan. 6 as U.S. service industries expanded at a slower pace than forecast in December. The Institute for Supply Management’s non-manufacturing index decreased to a six-month low of 53, a report from the Tempe, Arizona-based group showed. Readings above 50 signal growth.

Crude gained 24 cents to $93.67 on Jan. 7, halting its longest run of declines since September, after equities rose as German unemployment fell for the first time in five months. The number of people out of work in Germany decreased by a seasonally adjusted 15,000 to 2.965 million, the Nuremberg-based Federal Labor Agency said.

Fuel Inventories

WTI dropped 2.1 percent to $91.66 on Jan. 8 and 9, slipping to the lowest close since May 1. The EIA said on Jan. 8 that fuel stockpiles surged in the week ended Jan. 3 while total products supplied, a measure of fuel demand, tumbled 4.1 percent to 18.2 million a day, the least since June 7.

Futures climbed on Jan. 10 as worse-than-expected jobs data reduced concern that the Federal Reserve will further pare bond buying. Payrolls increased in December at the slowest pace since January 2011 and the unemployment rate declined as more people left the labor force. Prices also gained as China’s crude imports climbed to a record.

Net-long positions in WTI crude declined by 23,209 futures and options combined to 247,177, the lowest level since the week ended Dec. 3. Long positions slipped by 7,987 futures and options combined, while shorts surged by 15,222, or 53 percent.

“It’s interesting that the pickup in short interest was the bigger part of the flow,” said Tim Evans, an energy analyst at Citi Futures in New York. “It was a bear raid as they came in to short the market.”

Gasoline Wagers

In gasoline, bullish bets held by money managers, including hedge funds, commodity pools and commodity-trading advisers, tumbled by 6,699 futures and options combined, or 12 percent, to 47,938, the first decline in three weeks, the CFTC data showed.

Futures fell 10.72 cents, or 3.8 percent, in the reporting period to $2.6786 a gallon on the Nymex. The fuel increased 2.65 cents, or 1 percent, to settle at $2.6691 on Jan. 10. Gasoline dropped 3.5 cents to $2.6341 today.

Regular gasoline at the pump, averaged nationwide, slipped 0.1 cent to $3.312 a gallon yesterday, according to Heathrow, Florida-based AAA, the largest U.S. motoring group.

Money managers’ bullish wagers on U.S. ultra low sulfur diesel slipped 10,396 futures and options combined, or 39 percent, to 16,206.

The fuel increased 11.79 cents, or 3.8 percent, to $2.9593 a gallon in the reporting week ended Jan. 7. The contract climbed 1.93 cents, or 0.7 percent, to $2.9407 on Jan. 10. Prices fell 0.74 cent to $2.9333 today.

‘Bearish Market’

“Investors in the products are trimming their risk in a bearish market,” Evans said. “They reduced their long positions as prices fell. We’ve seen a big drop in product demand accompanied by a gain in supply.”

Net-long wagers on four U.S. natural gas contracts declined 7,008 futures equivalents, or 1.8 percent, to 382,634.

The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.

Natural gas futures gained 6.9 cents, or 1.6 percent, to $4.299 per million British thermal units on the Nymex during the report week, and rose 1.2 percent to $4.053 on Jan. 10. Futures surged 22.1 cents, or 5.5 percent, to $4.274 today.

“We ended the week with upward movement in prices but the odds are that the decline will resume,” Flynn said. “We’re looking for further supply gains in January. The increase in fuel inventories has already scared the bulls.”

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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