Oil Speculators Raise Bets on Falling Prices to All-Time High

Oil's Year Ahead: Production Decline, Dividend Cuts
  • Hedge funds increased short bets 15% in week to Jan. 12: CFTC
  • Crude drops to lowest since 2003 as Iran ready to ship more

Hedge funds increased bearish oil wagers to a record as global equities fell and Iran was poised to add to the crude supply glut.

Oil dropped below $30 a barrel in New York for the first time in 12 years on Jan. 12 amid concern that turmoil in China’s markets will curb fuel demand. Prices dropped further as the week progressed on signs that sanctions against Iran would be lifted, allowing a boost in crude shipments from OPEC’s fifth-biggest member. The restrictions were removed on Jan. 16.

“There’s escalating recognition that any added production will prolong the surplus,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “Oil is also down on worries about demand. The impact of concerns about China on all markets underscores worries about global economic growth.”

Speculators’ short position in West Texas Intermediate crude rose 15 percent in the week ended Jan. 12, data from the U.S. Commodity Futures Trading Commission show. It’s the highest in records dating back to 2006. Net-long positions fell to the lowest in more than five years.

WTI slumped 15 percent to $30.44 a barrel in the report week on the New York Mercantile Exchange. Prices on Monday dropped as much as 3.6 percent to $28.36 a barrel, the lowest in intraday trade since October 2003, and changed hands at $29.38 as of 12:32 p.m. London time.

Nuclear Report

The International Atomic Energy Agency concluded on Jan. 16 that the Islamic Republic had curbed its ability to develop an atomic weapon as required under the July accord with world powers. The U.S. and five other nations agreed to lift the economic sanctions related to Iran’s nuclear program “simultaneously with the IAEA-verified implementation” of the deal.

Iran is targeting an immediate increase in shipments of 500,000 barrels a day, Amir Hossein Zamaninia, deputy oil minister for commerce and international affairs, said on Sunday. It plans to add another half-million barrels within months. Analysts and economists surveyed by Bloomberg said it can only add 400,000 barrels after six months. 

U.S. crude inventories climbed in the week ended Jan. 8, adding to the glut, Energy Information Administration data show. Supplies at Cushing, Oklahoma, the delivery point for WTI, rose to a record.

Speculators’ short position in WTI rose by 25,899 contracts to 200,975 futures and options, CFTC data show.  Longs, or bets that prices will rise, climbed 7.4 percent, the biggest gain in a year. Net longs dropped 9.3 percent.

“There are a lot of people who thought oil can’t go down much further and tried to call a bottom,”said Michael Corcelli, chief investment officer of hedge fund Alexander Alternative Capital LLC in Miami. “When we have monster pullbacks, things don’t end politely. I think we’ll drop to $24 or $25 and then have a sharp V-shaped rally.”

Data on Brent crude trading show a divergence from the trend in WTI. A report from ICE Futures Europe showed Monday that hedge funds and other money managers raised bullish bets on Brent crude by 17,507 contracts in the week ended Jan. 12.

Speculative bets that prices will rise, in futures and options combined, outnumbered short positions by 202,559 lots, the London-based exchange said in its weekly Commitments of Traders report.

Other Markets

In other markets, net bearish wagers on U.S. ultra low sulfur diesel decreased 27 percent to 22,951 contracts. Diesel futures slid 12 percent in the period. Net bullish bets on Nymex gasoline slipped 38 percent to 16,786 contracts as futures dropped 14 percent. 

Falling prices are curbing investment, setting the stage for output declines that will reduce the global glut later this year, according to Bank of America Corp. and Goldman Sachs Group Inc.

U.S. output should be down by about 1 million barrels in the second quarter from last year’s peak, Daniel Yergin, vice chairman of industry consultants IHS Inc., said Jan. 15 on Bloomberg Television.

”There will eventually be signs of falling production and that will be the first indication that the market is going to stabilize and start to recover,” said Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts.

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