Crude Oil Tumbles to 12-Year Low as Hedge Funds Head for Exit

  • Speculators cut net-long positions 24% in week to Jan. 5: CFTC
  • Morgan Stanley says stronger dollar may drag Brent down to $20

Crude Oil Hits New Lows, What's Next?

Crude declined to a 12-year low, confirming the view of hedge funds that turned the least bullish since 2010.

Futures dropped 5.3 percent in New York, adding to last week’s 10 percent slide. Speculators’ net-long position in West Texas Intermediate crude shrank 24 percent in the week ended Jan. 5, U.S. Commodity Futures Trading Commission data show. Producer prices in China fell for a record 46th month, bolstering concern about the world’s second-biggest economy. A rapid U.S. dollar gain may send Brent oil to as low as $20 a barrel, Morgan Stanley said.

"We want to see a sign that China has hit bottom and haven’t gotten it yet," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "I’m not convinced that Brent is likely to go to $20 because of the stronger dollar, but it’s certainly a realistic possibility."

Oil slumped last week as volatility in Chinese markets fueled a rout in global equities and U.S. stockpiles remained more than 120 million barrels above the five-year average. Saudi Arabian Oil Co., the world’s biggest crude exporter, confirmed on Jan. 8 it was studying options for a share sale, including listing “a bundle” of refining subsidiaries.

WTI for February delivery fell $1.75 to settle at $31.41 a barrel on the New York Mercantile Exchange. It’s the lowest close since Dec. 5, 2003. Total volume traded was 47 percent above the 100-day average at 2:50 p.m.

Bullish Bets

Brent for February settlement decreased $2, or 6 percent, to end the session at $31.55 on the London-based ICE Futures Europe exchange. It was the lowest close since April 2004. The European benchmark crude ended at a 14-cent premium to WTI.

Commodity producers led declines on the Standard & Poor’s 500 Index. The S&P 500 Oil & Gas Exploration and Production Index dropped 5.1 percent, led by Cabot Oil & Gas Corp. and Marathon Oil Corp. Freeport-McMoRan Inc., the top publicly traded copper producer, dropped 19 percent, making it the worst performer on the S&P 500.

Speculators’ net-long position in WTI declined by 23,863 contracts to 76,934 futures and options, the lowest since July 2010, CFTC data show.

"The hedge funds are saying that this isn’t a good time to try and find a bottom in the oil market," said Bob Yawger, director of the futures division at Mizuho Securities USA in New York

Crude also fell as the U.S. dollar climbed, diminishing the appeal of commodities denominated in the currency. The Bloomberg Commodity Index, a gauge of 22 raw materials slumped to the lowest level since 1999.

Dollar Impact

Oil is particularly leveraged to the dollar and may fall between 10 to 25 percent if the currency gains 5 percent, Morgan Stanley analysts including Adam Longson said in a research note dated Monday. Societe Generale SA cut its average 2016 Brent forecast to $42.50 a barrel from $53.75 in a report Monday, while Bank of America Corp. trimmed its forecast to $46 a barrel from $50.

"There are no technicals holding up the price so we’re looking at a falling knife," said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. "Concern about global economic sentiment and dollar strength are continuing to weigh on the market."

Saudi Arabian Oil Co., known as Aramco, is studying whether to list “an appropriate percentage” of shares of the parent or a bundle of “downstream” units, according to an e-mailed statement Jan. 8. The findings of the review will be presented to the board of directors, which will make recommendations to the state-owned company’s Supreme Council, Aramco said.

Ample Stockpiles

A U.S. Energy information Administration is projected to report on Jan. 13 that inventories of crude oil, gasoline and distillate fuel increased last week, according to a Bloomberg survey of analysts.

"Another bearish storage report will send us to new lows and this week’s has the potential to be a doozy," Yawger said.

Fuel futures followed crude to new lows. Gasoline for February delivery dropped 1.3 percent to $1.113 a gallon, the lowest close since February 2009. Diesel for February delivery decreased 3.5 percent to settle at $1.0149, the lowest since June 2004.

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