Oil at 5-Year Low Amid Concern Funds May Resume Selling

Brent crude and West Texas Intermediate slumped to five-year lows amid concern that hedge funds and other money managers bet too much on rising prices.

Both futures dropped 4.2 percent. Net-long positions on Brent rose to the highest in four months in the week to Dec. 2, according to data from the ICE Futures Europe exchange, while bullish bets on WTI climbed the most in 20 months. Brent declined 9.9 percent in the period and WTI slumped 9.7 percent.

“People might consider it a buying opportunity but we still have an over-supplied market,” said Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC. “New lows will be tested. We are in for a volatile market. You have to expect very sharp swings.”

Both Brent and WTI tumbled 18 percent in November as the Organization of Petroleum Exporting Countries decided to maintain its 30 million-barrel-a-day output target. Crude has traded in a bear market since October amid the fastest pace of U.S. production in three decades, rising output from OPEC and signs of weakening global demand. Banks including Morgan Stanley, BNP Paribas SA and Barclays Plc have cut price forecasts.

Brent for January settlement declined $2.88 to $66.19 a barrel on the London-based ICE Futures Europe exchange, the lowest since Sept. 29, 2009. The volume of all futures was 4.9 percent below the 100-day average.

Bullish Bets

WTI for January delivery dropped $2.79 to end at $63.05 a barrel on the New York Mercantile Exchange, the lowest settlement since July 16, 2009. Volume was 13 percent above the 100-day average.

“The market continues to search for a bottom but it doesn’t feel like we’ve found one,” said Gene McGillian, a senior analyst at Tradition Energy in Stamford, Connecticut. “You’ll continue to see longs exit the market. You don’t want to catch a falling knife.”

Hedge funds raised bullish bets on Brent crude by 31,303 contracts in the week ended Dec. 2, according to data from ICE Futures Europe. In New York, net-long positions on WTI jumped 14 percent, after falling to the lowest level since January 2013 the previous week, according to Commodity Futures Trading Commission.

Investors added $98 million into the four biggest exchange-traded funds that follow oil prices in the first four days of this month, following a $559.85 million inflow in November that was the most since June 2012, according to ETF data compiled by Bloomberg.

‘Very Risky’

“A lot of people are trying to pick the bottom,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “It’s very risky.”

A supply surplus will peak in the second quarter of next year after OPEC refrained from tackling an oversupply, Morgan Stanley analyst Adam Longson said in a Dec. 5 report. The bank cut its 2015 estimate for Brent to $70 a barrel, from $98 previously.

OPEC, responsible for about 40 percent of the world’s oil supply, pumped 30.6 million barrels a day in November, above the 30 million target for a sixth month, according to data compiled by Bloomberg

“By choosing to abdicate its role as a swing supplier, rather than implement a necessary supply adjustment to balance the market, the cartel has entrenched a projected surplus in the global oil supply and demand balance,” said Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy, in a report Dec. 5. The bank cut its 2015 WTI forecast by $18 after the OPEC decision to $70 and Brent by $20 to $77.

Iraq Price Cut

Iraq cut its oil prices to Asian customers to the lowest in at least 11 years. The second-largest producer in OPEC after Saudi Arabia also reduced official selling prices to the U.S., according to a price list obtained by Bloomberg News. The move came after Saudi Arabia lowered the OSP to Asia to a discount of $2 against the regional benchmark for January, the biggest in data compiled by Bloomberg since June 2000.

Explorers in the U.S. increased the number of operating rigs last week, defying predictions of a drilling slowdown. The number of rigs in operation rose to 1,575 through Dec. 5, the first gain in three weeks, according to data from Baker Hughes Inc., a Houston-based field services company.

U.S. oil production accelerated to 9.08 million barrels a day through Nov. 28, according to Energy Information Administration estimates. That’s the fastest rate in weekly records that started in January 1983.

China, the world’s second-biggest oil consumer, imported 25.41 million metric tons of crude last month, according to preliminary data from the General Administration of Customs in Beijing today. Shipments increased to about 6.21 million barrels a day, up 9 percent from a month earlier.

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