The world’s biggest oil companies are painting a grim picture of the future and speculators are listening.
Hedge funds reduced bullish bets to the lowest level in five years as oil capped the worst month since the financial crisis. The net-long position in West Texas Intermediate contracted 7 percent in the seven days ended July 28, U.S. Commodity Futures Trading Commission data show. Speculators curbed their bullish stance in Brent, the global benchmark, by the most in a year.
BP Plc said oil prices will be lower for longer and Royal Dutch Shell Plc said it’s preparing for a prolonged downturn. Exxon Mobil Corp. and Chevron Corp. reported their worst earnings in years. Supply will outpace demand by 1 million barrels a day through 2016, according to Bank of America Corp. Prices need to stay below $40 a barrel for months for U.S. output to fall enough to erode the global surplus, IHS Inc. said.
“The speculators are looking at the bad earnings and the oil executives’ negative tone of commentary, and taking it as a bearish sign,” Phil Flynn, senior market analyst for Price Futures Group Inc. in Chicago, said by phone July 31. “Everybody is running out of this market in droves.”
WTI dropped $2.38, or 4.7 percent, to $47.98 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. Futures slid $1.61 to $45.51 at 12:22 p.m. New York time after dropping 21 percent in July, the biggest monthly decline in almost seven years.
Exxon, the biggest U.S. energy producer, reported July 31 its lowest profit since 2009 while No. 2 Chevron posted its worst results in 12 years. Chevron earlier last week said it would eliminate 1,500 jobs in an effort to cut $1 billion in spending.
BP, Shell, Schlumberger Ltd. and Halliburton Co. have announced thousands of job cuts in recent weeks as they prepare for a prolonged stretch of low prices. Since the crude rout began last summer, the industry has eliminated 150,000 jobs, according to Graves & Co., a Houston-based adviser that has closely tracked the cutbacks.
“We’re hearing less talk about prices being unsustainably low and somewhat more talk about prices being lower for longer,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone July 31. “That’s a more realistic expectation.”
U.S. crude supplies are 95 million barrels above the five-year average, according to the Energy Information Administration. Inventories in Cushing, Oklahoma, the delivery point for U.S. futures, are at a record high for the end of July.
Drillers have halted their record retreat from oil fields, increasing the number of active oil rigs by five to 664 last week, Baker Hughes data show. Even with less than half as many rigs in the field as last year, oil production has climbed as companies have focused on richer fields and more efficient drilling methods.
“Costs are lower this year by about 20%, so that a break-even cost of $60 in 2014 is now in the upper $40s per barrel for WTI,” James Burkhard, a vice president at Englewood, Colorado-based energy consultant IHS, said in a report July 31.
The net-long position for managed money in WTI fell by 7,450 contracts to 98,933 futures and options, the smallest since September 2010. Long positions rose 3 percent while short holdings jumped 11 percent to the highest level since March.
Money managers cut net-long positions in Brent crude by 37,527 contracts in the week to July 28, the biggest reduction since July 2014, according to data from the ICE Futures Europe exchange. That curbed net-length in the marker to the lowest since February. Brent fell below $50 a barrel for the first time since January.
In other markets, net bullish bets on Nymex gasoline contracted 22 percent to 13,604. Futures fell 6.1 percent to $1.8032 a gallon. Net-short wagers on U.S. ultra low sulfur diesel decreased 3.1 percent to 20,068 contracts. The fuel slipped 4.4 percent to $1.6044 a gallon.
Output from the Organization of Petroleum Exporting Countries in July was up 6.5 percent from a year ago. Oil exports from southern Iraq rose to a record 3.064 million barrels a day in July, Thaer Yassin, spokesman of the state-owned South Oil Co., said last week.
“If we’re living in a world where U.S. production is up 9 percent and OPEC is 6 percent higher, and global demand is growing by 1.4 percent, you can understand that there’s an imbalance there,” said Evans of Citi Futures Perspective.