Oil Supply Cuts From Nigeria to Canada Renew Bets on Price Rally

Have Benefits of Lower Oil Prices Been Realized?
  • Hedge funds boost bullish wagers by most since March: CFTC
  • Nigeria pumps least oil in 27 years as militant attacks expand

Investors have some sad reasons to be optimistic about oil prices.

Outbreaks of violence in Nigeria, export troubles in a divided Libya and wildfires ripping across the Canadian oil sands are reviving wagers that crude markets will tighten. Speculators’ net-long position in benchmark U.S. crude, a measure of how bets on a price increase outnumber bearish ones, climbed by the most contracts since March, according to data from the Commodity Futures Trading Commission.

"The main bullish factor has been the outages," said Michael Wittner, the New York-based head of oil-market research at Societe Generale SA. "There are many outages, led by Nigeria and Canada. We’re missing a lot of crude."

West Texas Intermediate futures are heading for a fourth-straight monthly gain, which would be the longest rally in five years, as evidence mounts that demand may soon outpace supplies.

QuickTake Oil Prices

Investors’ net-long position in WTI futures climbed 14 percent in the week ended May 17, according to the CFTC. Short positions, or bets crude prices will drop, shrank.

WTI futures surged 8.2 percent on the New York Mercantile Exchange during the CFTC report week, while the June contract on Friday dropped 0.9 percent to close and expire at $47.75 a barrel. WTI for July delivery slid 0.7 percent to $48.08 on Monday.

New Wrinkle

Nigerian crude output has tumbled as militants resumed blowing up the pipelines that crisscross the mangrove swamps of the Niger River delta, ending years of relative peace. A wave of attacks this month is pushing production to a 27-year low of 1.4 million barrels a day.

"The new wrinkle is Nigeria," said John Kilduff, a partner at Again Capital LLC in New York. "It’s been a long time since we’ve worried about the supply of West African crude."

In Libya, competing administrations of the state-run National Oil Corp. have brought exports to a halt, the latest setback to supplies from a nation devastated by conflict. In the five years since the ouster of Muammar al-Qaddafi, Libya’s oil installations have been attacked and ports shut down as groups vie for influence.

Canadian Fires

The Canadian wildfire doubled to an area more than five times bigger than New York City in about a week, threatening oil-sands mines. More than 80,000 people around Fort McMurray in northern Alberta fled the inferno earlier in the month, and the industry shut down more than 1 million barrels a day of output. Cooler weather is now helping to control the blaze.

The oil market has moved into a production deficit earlier than expected following supply disruptions and an increase in demand, according to Goldman Sachs Group Inc. Other banks such as Morgan Stanley, Barclays Plc and Bank of America Corp. have also noted that supply losses are leading markets to rebalance.

"The disruptions are getting people thinking that supply may soon trail demand," Again Capital’s Kilduff said. "This is especially true given the thesis that the market was going to come into balance later this year anyway."

The net-long position in WTI rose by 30,475 futures and options combined to 246,996, the biggest gain since March, CFTC data show. Short positions tumbled 24 percent, while longs rose 3.6 percent.

U.S. Production

U.S. crude output fell to 8.79 million barrels a day in the week ended May 13, the least since September 2014, an Energy Information Administration report showed. Gasoline use averaged 9.56 million barrels a day in the four weeks ended May 13, the highest seasonal level in at least a decade, according to EIA data.

In other markets, net bullish bets on Nymex gasoline surged 53 percent to 23,756 contracts. Gasoline futures increased 10 percent in the period. Net bullish wagers on U.S. ultra low sulfur diesel more than doubled to 5,862 contracts, the highest since July 2014, as futures climbed 9.7 percent. 

Managed money bets will shift if the disruptions are reduced, SocGen’s Wittner said. Canadian output would rebound in weeks if the weather cooperates, said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. 

Municipal authorities in Alberta, citing improved conditions late on Friday in wildfire zones, lifted mandatory evacuation orders for seven oil-sands worker camps and production facilities, including Suncor Energy Inc.’s base plant mine and Syncrude Canada Ltd.’s Mildred Lake operation.

"There’s a high probability that Canadian production will recover rather quickly," Lynch said. "Nigeria and Libya will probably take a lot longer. There’s no telling whether it will take weeks, months or years for their production to rebound.”

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