Hedge Funds Cut Bearish Oil Bets Before Rebound From 12-Year Low

Shorts Fall From Record as Oil Rebounds
  • Speculators lowered short positions in WTI by 8.4%: CFTC
  • Front-month WTI had biggest two-day gain in over seven years

Hedge funds reduced record bets on falling oil prices ahead of the biggest two-day rally since 2008.

West Texas Intermediate futures rebounded from a 12-year low last week, part of a broad rally in global markets fueled by speculation that central banks will expand stimulus measures. Pierre Andurand, the founder of $615 million Andurand Capital Management who correctly predicted the slump in prices, said oil will end the year higher.

“Getting below $30 exceeded a lot of people’s wildest expectations,” said Andrew Lebow, a senior partner at Commodity Research Group in New York. “At that point you just begin to take a profit.”

Speculators’ short position in WTI shrank 8.4 percent in the week ended Jan. 19, data from the U.S. Commodity Futures Trading Commission show. Their net-long position increased 17 percent.

WTI dropped 6.5 percent in the report week on the New York Mercantile Exchange and closed at $26.55 a barrel on Jan. 20, the lowest settlement since May 2003. Prices jumped 9 percent on Jan. 22, capping the biggest two-day rally since September 2008. The front-month contract settled at $30.34 a barrel Monday.

Oil will probably rise to $50 a barrel this year and $70 in 2017, though investors should expect heightened volatility along the way, Andurand said Jan. 22.

Global Rally

Global stocks surged the most since 2012 on Jan. 22 after the European Central Bank signaled rates may hold steady or go lower, China said it has no plans to further devalue the yuan and pressure increased on the Bank of Japan to enlarge stimulus.

Prices had slumped amid concern that turmoil in China’s markets would curb fuel demand at a time when fresh crude exports from Iran are poised to exacerbate a global glut. The International Energy Agency warned Jan. 19 that global oil markets could "drown in oversupply."

Oil may be the “trade of the year” if it can weather the surge in Iran’s shipments, according to Citigroup Inc.

Cash-strapped drillers have cut billions from spending plans and idled 68 percent of the rigs seeking oil in the U.S. Output from the prolific shale regions that have propelled the nation’s oil renaissance will fall by 640,000 barrels a day from its peak by the end of February, according to the Energy Information Administration. 

The oil market is bottoming, Mercuria Energy Group Ltd. Chief Executive Officer Marco Dunand said in an interview at the World Economic Forum in Davos, Switzerland. "Oil producers are strained to the limit and some of them are pumping at a loss," he said.

Speculators’ short position in WTI, or wagers on falling prices, dropped by 16,782 contracts to 184,193 futures and options, CFTC data show. Longs fell by 4,580 to 266,150, bringing the net-long position up 12,202 to 81,957.

Other Markets

In other markets, net bearish wagers on U.S. ultra low sulfur diesel rose 9.9 percent to 25,232 contracts. Diesel futures slid 8.2 percent in the period. Net bullish bets on Nymex gasoline increased 19 percent to 19,973 contracts as futures dropped 5.4 percent. 

In London, money managers raised bullish bets on Brent crude by 5,594 contracts, according to data from ICE Futures Europe. Speculative bets that prices will rise, in futures and options combined, outnumbered short positions by 208,153 lots, the exchange said in its weekly Commitments of Traders report.

The oil glut may limit any rallies. U.S. inventories are about 130 million barrels above the five-year average and supplies at Cushing, Oklahoma, the delivery point for WTI, are at a record.

"It’s a temporary bounce," said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. "This is an opportunity to reload the gun on the short side."

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