Speculators Cutting Bullish Oil Bets Miss Ukraine Rally

July 21 (Bloomberg) -- On today’s “Insight & Action,” Bloomberg “Money Clip” Host Adam Johnson reports on market response to global crises. (Source: Bloomberg)

The downed jetliner in Ukraine and Israel’s Gaza offensive blindsided speculators who had cut bullish crude bets on the assumption that risks to supply were diminishing.

Crude futures rose after money managers slashed net-long positions in West Texas Intermediate, the U.S. benchmark grade, by 15 percent in the seven days ended July 15, the Commodity Futures Trading Commission said. It was the biggest drop in bullish wagers since March 2013.

“A lot of people were clearly caught off guard by events,” Amrita Sen, chief oil analyst for London-based Energy Aspects Ltd., a researcher, said by phone July 18.

Prices dropped below $100 on July 15 for the first time in two months as the conflict in Iraq spared the country’s main oil-producing region and rebels in Libya said they would reopen export terminals. Hedge funds had increased bets on rising prices to a record, while WTI climbed to a nine-month high in June after militants from a breakaway al-Qaeda group known as Islamic State captured the city of Mosul.

Crude declined 3.3 percent to $99.96 a barrel on the New York Mercantile Exchange in the period covered by the CFTC. WTI rebounded to $103.13 by July 18 and added 1.4 percent to $104.57 at 2:16 p.m. today.

Photographer: Bulent Kilic/AFP via Getty Images

The Malaysian Airlines jet went down over eastern Ukraine, killing all 298 people aboard, July 17, just a day after the U.S. and the European Union imposed new sanctions on Russia, the world’s biggest energy exporter, over its support of separatists in eastern Ukraine. Close

The Malaysian Airlines jet went down over eastern Ukraine, killing all 298 people... Read More

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Photographer: Bulent Kilic/AFP via Getty Images

The Malaysian Airlines jet went down over eastern Ukraine, killing all 298 people aboard, July 17, just a day after the U.S. and the European Union imposed new sanctions on Russia, the world’s biggest energy exporter, over its support of separatists in eastern Ukraine.

‘Too Optimistic’

“The speculators built length to a record last month, but there was no real loss of oil so they started to exit,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone on July 18. “The events of the last several days show they might have been too optimistic.”

The Malaysian Airlines jet went down over eastern Ukraine, killing all 298 people aboard, July 17, just a day after the U.S. and the European Union imposed new sanctions on Russia, the world’s biggest energy exporter, over its support of separatists in eastern Ukraine. OAO Rosneft, Russia’s largest oil company, and natural gas producer OAO Novatek were among those covered by the penalties.

Israel began a ground operation in Gaza on July 17, also bolstering crude prices. Prime Minister Benjamin Netanyahu said July 18 that the objective of the ground incursion was to go after “terror tunnels” and restore peace. The Middle East accounted for 32 percent of global crude output last year, BP Plc data show.

Falling Supplies

Futures climbed 1.2 percent on July 16 after the Energy Information Administration said U.S. crude supplies dropped 7.53 million barrels to 375 million in the week ended July 11. Stockpiles at Cushing, Oklahoma, the delivery point for WTI traded in New York, fell by 650,000 barrels to 20.3 million, the least since November 2008. Refineries operated at 93.8 percent of capacity, the highest level since August 2005.

“We have strong refinery runs and a downtrend in supplies both nationwide and at Cushing, giving the market support, but if we look ahead, that’s going to shift,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone July 18. “We’re probably at our seasonal peak for refinery runs and as they go into maintenance, crude supplies are going to rebound.”

Refinery operating rates usually increase in late spring and have peaked in July during the past five years, EIA data show. Refiners schedule maintenance for September and October as they transition to winter from summer fuels.

Geopolitical Risk

“Unless there is a major intensification of geopolitical risk, it’s going to be hard to keep crude prices up here,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone July 18.

In other markets, bullish bets on gasoline fell 33 percent to 43,702 futures and options combined, the least since February. Futures declined 2.5 percent to $2.8986 a gallon on Nymex in the reporting period. They dropped 2.14 cents to $2.8603 on July 18, the lowest close since Feb. 28.

Regular gasoline at the pump, averaged nationwide, dropped 0.4 cent to $3.574 a gallon yesterday, the lowest since April 4, according to Heathrow, Florida-based AAA, the largest U.S. motoring group.

Bullish wagers on U.S. ultra-low-sulfur diesel plunged 61 percent to 8,784, the lowest since January. The fuel decreased by 1.81 cents to $2.8555 a gallon in the report week. Diesel fell 1.4 cents to $2.8452 on July 18, the lowest settlement since Nov. 7.

Natural Gas

Net-long wagers on U.S. natural gas dropped 3.1 percent to 226,861, the lowest since December. 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.

Nymex natural gas dropped 2.5 percent to $4.097 per million British thermal units during the report week. It fell as much 3.1 percent today after settling July 18 at $3.951, the lowest close since November.

Net-longs for WTI slipped by 45,107 to 259,259 futures and options, the lowest level since the seven days ended Jan. 21. Long positions fell 10 percent 304,462, the least since January. Shorts climbed 38 percent, to 45,203, the highest level since January.

“The only thing you can be safe to predict is a lot of volatility,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion, said by phone July 18. “Investors are going to be closely following every headline and trading accordingly.”

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

To contact the editors responsible for this story: Dan Stets at dstets@bloomberg.net; David Marino at dmarino4@bloomberg.net Charlotte Porter

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