Hedge Funds Are Losing Faith in Oil Rally While Inventory Swells

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Getting Ready to See Next Leg Down on Oil: Shilling

Hedge funds cut bets on rising oil prices at the fastest pace since December 2012 as U.S. inventories expanded to the highest in more than three decades.

Speculators pared their net-long position in West Texas Intermediate crude by 19 percent in the week ended March 3, U.S. Commodity Futures Trading Commission data show. Short wagers increased to a record for a second week.

Oil producers are spending less, idling rigs and delaying wells to stem output that the government predicts will reach a four-decade high this year. That’s having little effect so far, with U.S. crude inventories expanding by 10.3 million barrels in the week ended Feb. 27, the most since 2001.

“The supply builds are astounding and we’re going to run out of places to put the stuff,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion, said by phone March 6. “Ultimately something has got to give and the CFTC shows people are positioning for a collapse of the front contract.”

WTI rose $1.24, or 2.5 percent, to $50.52 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. The U.S. benchmark grade gained 39 cents to $50 a barrel Monday.

Cushing Stockpiles

Crude supplies nationwide reached 444.4 million barrels, the most in weekly Energy Information Administration data going back to 1982. Inventories at Cushing, Oklahoma, the delivery point for WTI, rose to 49.2 million, the most since June 2013. Stockpiles in the Midwest advanced to a record 133.3 million, while those along the Gulf Coast surged to an all-time high of 219.9 million.

“Excess storage capacity has been shrinking fast,” Mike Wittner, head of oil research at Societe Generale SA in New York, said by phone March 6. “It’s not far-fetched to think about supply hitting the tank tops in a couple of months.”

U.S. crude production rose to 9.32 million barrels a day, the most in weekly estimates that started in January 1983. Output will rise 7.8 percent this year to average 9.3 million barrels a day, the EIA said in a Feb. 10 report.

From North Dakota to Texas, more than 3,000 wells have been drilled but not tapped, based on estimates from Wood Mackenzie Ltd. and RBC Capital Markets LLC.

Brent crude, the benchmark for more than half the world’s oil, rose 2.1 percent in London this year while WTI dropped 6.1 percent. The gains in Brent were driven in part by attacks on pipelines, ports and fields in Libya, which holds Africa’s biggest crude reserves.

Gasoline Wagers

Net-long positions for WTI dropped by 38,299 to 164,310 futures and options in the week ended March 3, according to the CFTC, the lowest level since November. Short bets climbed 17 percent to 138,007 and long positions fell 5.6 percent to 302,317.

In other markets, bullish bets on gasoline climbed 2.7 percent to 42,312 contracts, the first gain in three weeks. Futures rose 20 percent to $1.9499 a gallon on Nymex in the reporting period.

Regular gasoline at U.S. pumps has rebounded after falling in January to the lowest level since April 2009. The average retail price slipped 0.1 cent to $2.453 a gallon March 8, the first drop in more than five weeks, according to data from Heathrow, Florida-based AAA, the nation’s biggest motoring group.

Bearish wagers on U.S. ultra-low-sulfur diesel decreased 27 percent to 11,084 contracts, the least since August. The fuel dropped 4.4 percent to $1.9395 a gallon in the report week.

Natural Gas

Net-short wagers on U.S. natural gas slipped 4.8 percent to 40,191, the lowest since January. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract.

Nymex natural gas fell 6.5 percent to $2.712 per million British thermal units in the report week.

U.S. crude inventories continued to climb even as the number of active rigs tumbled. Baker Hughes Inc. said Friday that drillers idled rigs for a 13th week, cutting them by 64 to 922, the fewest since April 2011.

“They are being strategic about the cuts and trimming the weakest rigs and fields first,” Stewart Glickman, an equity analyst at S&P Capital IQ in New York, said by phone March 6. “Eventually we will get to equilibrium but not any time soon, certainly not in 2015.”