Oil Bulls Maintain Momentum as Rig Cutbacks Seen Reducing Glut

  • Managed money net-long positions climb to highest since June
  • Rigs targeting oil in the U.S. fell by 10 to 595: Baker Hughes

Hedge funds increased bullish oil wagers on speculation that falling investment will diminish the global supply glut.

Money managers boosted their net-long position in West Texas Intermediate crude by 6.6 percent in the week ended Oct. 13 to the highest level since June, according to data from the Commodity Futures Trading Commission. Shorts, or bets that prices will decline, dropped the eighth time in nine weeks.

Rigs targeting oil in the U.S. have dropped to a five-year low, while output has slipped from a four-decade high reached earlier this year. Crude production outside OPEC will shrink by 130,000 barrels a day next year as the U.S. shale boom collapses, the Organization of Petroleum Exporting Countries said in an Oct. 12 report. Schlumberger Ltd., the world’s largest oilfield-services provider, sees more pain for the industry as investment keeps dropping, Chief Executive Officer Paal Kibsgaard said Oct. 16.

“Schlumberger says things are tough and that it will take a long time before we see investment recover,” said Dan Heckman, senior fixed-income strategist in Kansas City, Missouri, at U.S. Bank Wealth Management, which oversees about $126 billion. “It’s going to take time to work through the system, but we can expect to see supplies tighten as production falls. The market will have an upward bias.”

WTI fell 3.9 percent in the report week to $46.66 a barrel on the New York Mercantile Exchange. It dropped 2.9 percent to $45.89 Monday, the lowest settlement since Oct. 2. Futures touched a six-year low of $37.75 in August.

Worldwide Demand

Global demand for crude is growing while non-OPEC countries are producing less of it, helping to bring the supply and demand back into equilibrium by next year, OPEC Secretary-General Abdalla Salem El-Badri and Kuwaiti Oil Minister Ali Al-Omair said last week in Kuwait City.

U.S. oil rigs fell by 10 to 595 last week, oilfield-services company Baker Hughes Inc. said on its website Oct. 16. U.S. crude output decreased 76,000 barrels a day to 9.1 million in the week ended Oct. 9, according to the Energy Information Administration. Production is down 514,000 barrels a day from the 9.61 million reached in June, the most since 1972.

A string of U.S. stockpile gains will end as refineries increase fuel output next month, said Tom Finlon, director of Energy Analytics Group LLC. Crude supplies rose the most since April, while refinery operations fell to the lowest level since January, EIA data showed last week.

“We’re approaching the nadir of the refinery activity,” Finlon, who is based in Jupiter, Florida, said by phone. “Refineries are going to start coming back from maintenance in November and with that will come an increase in demand.”

Bullish Bets

The net-long positions in WTI rose by 11,350 contracts to 184,317 futures and options, the most since the week ended June 30, CFTC data show. Shorts tumbled 17 percent, while longs decreased 2.4 percent.

In other markets, net bullish bets on Nymex gasoline decreased 27 percent to 17,043. Futures fell 8.5 percent in the period covered by the CFTC report to $1.314 a gallon. Net bearish wagers on U.S. ultra low sulfur diesel climbed 20 percent to 28,931 contracts. Diesel futures dropped 8.7 percent in the period to $1.4708 a gallon.

Ample supply and slowing Chinese economic growth helped send crude futures to a six-year low on Aug. 24. WTI rebounded and has traded above $43 since the start of September.

“There’s an ongoing reaction to the price behavior itself,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The increase in net-long positions was driven by a big drop in shorts, not a gain in longs. It’s starting to look like a bottom may have been established so you’re seeing investors exit short positions.”

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