Oil Bulls Lead Charge to $50 a Barrel

  • Managed money net-long positions climb to highest since July
  • Rigs targeting oil in the U.S. fell by 9 to 605: Baker Hughes

Is the Crude and Commodities Relief Rally for Real?

Hedge funds turned the most bullish on oil in three months, growing more confident that producers are pulling back fast enough to deflate a supply glut.

With U.S. oil floating near $50 a barrel again after almost three months in the $40s, money managers boosted their net-long position in West Texas Intermediate crude by 12 percent in the week ended Oct. 6, according to data from the Commodity Futures Trading Commission. Longs, or bets that prices will rise, climbed to the highest level in 14 weeks, while shorts fell. Investors also boosted their bullish bets in European benchmark Brent.

A “new capital discipline” in the industry will allow crude demand to catch up with supply, according to Gary Ross, the founder and chairman of PIRA Energy Group. The number of rigs targeting oil in the U.S. fell to 605 last week, the lowest in five years, according to data from oilfield-services company Baker Hughes Inc.

“The cutback in exploration rigs is so drastic that it will have to have a major impact,” Michael Corcelli, chief investment officer of hedge fund Alexander Alternative Capital LLC in Miami, said by phone. “We’re going to see much bigger declines in production next year.”

WTI increased 7.3 percent in the report week to $48.53 a barrel on the New York Mercantile Exchange. It dropped $2.53, or 5.1 percent, to settle Monday at $47.10, the biggest decline since Sept. 1.

Production Decline

U.S. crude output has dropped as falling prices spurred oil drillers to sideline more than half the country’s rigs in the past year. Production is down 440,000 barrels a day from a four-decade high of 9.61 million reached in June, weekly Energy Information Administration data show.

A key driver for rising oil prices will be the lack of spare production capacity, according to Ross, who predicted last year’s rout before turning bullish in 2015. It will take the U.S. shale industry at least nine months to boost output after crude climbs to more profitable levels, he said at a PIRA seminar in New York on Oct. 8.

World demand will expand by 1.5 million barrels a day this year, more than previously forecast, OPEC Secretary General Abdalla Salem El-Badri said in a statement to the International Monetary Fund last week.

Positive Signals

The first signs of recovery in the oil market are beginning to appear, Royal Dutch Shell Plc Chief Executive Officer Ben Van Beurden said at an industry conference in London on Oct. 6, though the company still plans for a long period of low prices.

The net-long positions in WTI advanced by 19,053 contracts to 172,967 futures and options, the highest since the period ended July 7, CFTC data show. Longs advanced 5.4 percent while shorts slipped 4.2 percent.

In London, money managers raised their net-long position in Brent by 13,131 contracts to 182,588 in the period to Oct. 6, data from the ICE Futures Europe exchange showed on Monday.

In other markets, net bullish bets on Nymex gasoline increased 35 percent to 23,350, the most since June. Futures climbed 5.4 percent in the period covered by the CFTC report to $1.4362 a gallon. Net bearish wagers on U.S. ultra-low-sulfur diesel declined 23 percent to 24,179 contracts, the least since July. Diesel futures advanced 7.6 percent in the period to $1.6115 a gallon.

WTI tumbled to a six-year low in August on speculation that the glut would grow as China’s economic slowdown weakened demand. U.S. crude supplies are about 100 million barrels above the five-year average and the Organization of Petroleum Exporting Countries has pumped above its target for 16 months.

Seasonal Increase

U.S. crude inventory gains could spur a renewed price rout, said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund. Stockpiles rose 3.07 million barrels in the week ended Oct. 2 as refinery operations fell to a seven month low, EIA data show. Supplies have increased during October in eight of the past 10 years. U.S. refiners typically plan maintenance for this time of year because demand dips with the end of the summer driving season.

“There are going to be some big builds in crude supply in the next weeks because of refinery maintenance, so you would be getting into the market now at your own peril,” Kilduff said by phone.

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