Speculators Share Andy Hall's Optimism That Oil Prices at Bottom

  • Hedge funds increased net-long positions the most since April
  • Onshore production in U.S. dropped for fifth straight month

Andy Hall and Daniel Yergin think oil prices are bottoming out. Hedge funds agree.

Money managers’ net-long position in West Texas Intermediate crude rose 20 percent in the week ended Nov. 3, the most in seven months, according to data from the U.S. Commodity Futures Trading Commission. Bets on rising prices increased to the highest level since June.

U.S. onshore oil production fell for the fifth month in a row in August and supplies grew at the slowest pace since September in the week ended Oct. 30. Inventory data don’t indicate a surplus in the crude market and prices are set to rise, said Hall, one of the world’s best-known oil traders. Global supply and demand will begin to move into balance by late 2016 or 2017, according to Yergin, a Pulitzer Prize-winning oil historian.

“The fundamentals are starting to play out,” said David Pursell, a managing director at investment bank Tudor Pickering Holt & Co. in Houston. “You’ve got greater recognition that U.S. supply is falling and maybe falling faster. Inventories are building, but the pace of that build is more manageable.”

WTI jumped 11 percent in the report week to a four-week high of $47.90 a barrel on the New York Mercantile Exchange. The contract declined 42 cents Monday to settle at $43.87.

Onshore Output

Onshore production excluding Alaska fell to 7.25 million barrels a day in August, down 334,000 barrels a day from March, according to Energy Information Administration data. U.S. oil inventories grew by 2.8 million barrels a day the week ended Oct. 30, the smallest gain since Sept. 18.

U.S. output will retreat by about 10 percent in the 12 months ending April, according to Yergin, vice chairman at IHS Inc. and author of the award-winning book “The Prize.” Prices may rise to $70 to $80 a barrel by the end of the decade, he said in an interview in Tokyo Oct. 30.

Hall, the crude trader who gained notoriety in 2009 after being paid about $100 million while at Citigroup Inc., said Saudi Arabia is producing close to capacity while Iraq is struggling to maintain output, while U.S. rig counts will continue to decline.

“We think the degree of negativity is unwarranted,” Hall, who runs $2.6 billion hedge fund Astenbeck Capital Management, said Nov. 4 at the Invest for Kids conference in Chicago.

Economic Growth

The U.S. economy added 271,000 jobs to nonfarm payrolls last month, the biggest increase of the year, a Labor Department report showed on Nov. 6. China’s biggest stock market rallied into a bull market this week and the government will lift a five-month freeze on initial public offerings by the end of the year.

“The economy is on the rebound, China is coming out of a bear market, people are saying let’s get long oil,” said Carl Larry, head of oil and gas for Frost & Sullivan LP. “We’re near the bottom at $40, and there’s a potential upside that’s much higher.”

Speculators’ net-long position in WTI increased by 28,761 contracts to 172,052 futures and options, CFTC data show. Shorts shrank by 17,395 contracts while longs increased by 11,366.

In other markets, net bearish wagers on U.S. ultra low sulfur diesel contracted 13 percent to 32,496 contracts. Diesel futures rose 9.9 percent in the period to $1.566 a gallon. Net bullish bets on Nymex gasoline rose 48 percent to 17,879. Futures rose 12 percent in the report period to $1.4455 a gallon. 

For the second week in a row, traders missed a reversal in prices. Crude fell the three days following the end of the CFTC report period. The previous week, oil rallied after hedge funds boosted short bets.

“They’re kind of chasing the price,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “We’re really seeing some very choppy trade flows to go along with some choppy price action.”

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