Speculators Shorting Crude Oil Cash Out to End `Great Year'

Oil's Wild Ride: What's Behind Today's Volatility?
  • Hedge funds close out 14,699 bets that crude oil will fall
  • West Texas Intermediate futures dropped 30 percent in 2015

After a great year of betting against oil, some bearish investors sat out the last week of 2015 after prices hit a six-year low.

Hedge funds’ bets on falling prices shrank 8.5 percent in the week ended Dec. 29 to a six-week low, according to Commodity Futures Trading Commission data. That didn’t mark a shift to optimism about oil, as speculators also reduced long positions.

“It’s definitely short covering after a great year for the shorts,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “We’ve come a long way down and plumbed some new lows in December.”

Speculators’ net-long position in West Texas Intermediate crude is hovering near the lowest level in five years. Their gloomy outlook was borne out Monday, as not even escalating tension between Saudi Arabia and Iran was enough to support a rally as WTI closed down 0.8 percent. Futures fell 32 cents to $36.44 a barrel at 9:44 a.m. New York time on Tuesday.

Mideast Tension

Saudi Arabia severed diplomatic ties with Iran over the weekend after Iranian protesters set fire to the Saudi embassy in Tehran following the execution of Saudi cleric Nimr al-Nimr, a critic of the kingdom’s treatment of its Shiite minority. Saudi Arabia and Iran have the world’s second- and fourth-largest proved reserves of oil, according to BP Plc.

"Saudi Arabia’s breaking of diplomatic relations with Iran is probably not an immediate game-changer for the oil market,” Paul Horsnell, head of commodities research for Standard Chartered Bank, said in a research note Monday. “The geopolitical premium in oil prices is likely to be small.”

QuickTake Short Selling

Supplies at Cushing, Oklahoma, the delivery point for oil futures traded in New York, climbed to a record 63 million barrels as of Dec. 25, Energy Information Administration data show.

Speculators’ long position, or wagers on rising WTI prices, shrank by 825 contracts of futures and options to 258,356, CFTC data show. Short positions, or bets that prices will fall, dropped by 14,699 to 157,559. Their net-long position rose to 100,797.

WTI rose 4.8 percent to $37.87 a barrel in the report week on the New York Mercantile Exchange. Crude prices fell 30 percent in 2015, and are down 66 percent from their 2014 peak.

Other Markets

In other markets, net bearish wagers on U.S. ultra low sulfur diesel decreased 9.8 percent to 35,339 contracts. Diesel futures rose 3.9 percent in the period. Net bullish bets on Nymex gasoline jumped 33 percent to 28,391 contracts as futures rose 8.6 percent.

Even with the short-covering, fundamentals for the market remain bearish, said Andy Lipow, president of Lipow Oil Associates LLC, an energy consulting firm in Houston. There are almost 3 billion barrels of oil and products like gasoline in developed countries’ storage tanks, according to the International Energy Agency. Sanctions against Iran over its nuclear program are set to end, allowing the OPEC member to boost oil exports.

“The market continues to be fundamentally oversupplied,” Lipow said. “The United Nations and Iran are well on the way to lifting sanctions that will see the return of Iranian oil to market soon.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE