Doha Failure Exposes Hedge Funds That Were Betting on Oil Freezeby
Output talks fail amid Saudi demands that Iran join freeze
Crude up more than 30% after mid-February preliminary deal
Hedge funds really wanted the Doha oil summit to work.
Money managers kept wagers on rising prices near a nine-month high in the days leading up to Sunday’s meeting of oil producers.
Then the negotiations between OPEC members and other producers ended without a deal to limit output after Saudi Arabia and other Gulf nations wouldn’t agree to any accord unless all members of the oil-exporter group joined, including Iran. U.S. crude futures in New York fell 1.4 percent to $39.78 a barrel after touching $37.61 earlier Monday.
The failure of the first significant attempt at coordinating oil supply between the Organization of Petroleum Exporting Countries and nations outside the group in 15 years threatens to undo a more than 30 percent gain in U.S. prices since the Saudis and Russia announced a preliminary plan in mid-February.
“Speculators came in on expectations that an agreement would be all but signed by Thursday and Friday,” said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. “You started seeing them exit as the chatter died down.”
After rising to $42.17 a barrel April 12 on the New York Mercantile Exchange, West Texas Intermediate crude prices slid for three days through Friday amid doubts that a decision could be reached while Iran, which is boosting oil exports after years of sanctions were lifted in January, has ruled out limiting output.
The prospect that producers might cap supply buoyed optimism that prices had reached a bottom. Hedge funds’ net-long position in WTI futures and options is more than twice as large as two months ago, after increasing by 11 percent in the week ended April 12, U.S. Commodity Futures Trading Commission data show.
“All these money managers who were expecting production to be frozen now are caught with the wrong end of the stick here,” Abhishek Deshpande, an analyst at Natixis SA in London, said in a Bloomberg Television interview. “For sure, these guys are going to sell off or get out of this at least until prices once again find a bottom.”
Hedge funds betting on Brent, the global benchmark traded in London, made the same mistake. Speculators boosted net-long positions in the North Sea marker by 47,595 contracts, the biggest increase since Jan. 26 to the highest since at least early 2011, when the data begins.
A drop in prices after the failure to reach a deal may be tempered as production in Kuwait fell by 60 percent after oil workers went on strike Sunday. Output dropped to 1.1 million barrels a day, according to Saad Al-Azmi, a spokesman for Kuwait Oil Co. That’s down from 2.81 million last month.
Global oil markets will “move close to balance” in the second half of the year as lower prices take their toll on output outside OPEC, the International Energy Agency said in a report on April 14. The world glut will ease to 200,000 barrels a day in the last six months of the year from 1.5 million in the first half, the IEA said. U.S. shale production may sink next month to the lowest level in almost two years, the Energy Information Administration estimated April 11.
“We’ve seen sentiment shift,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “There’s optimism about the market tightening and a feeling it will be sooner rather than later.”
Speculators’ net-long positions in WTI gained by 20,857 contracts of futures and options combined to 215,630, CFTC data show. Short positions, or bets that prices will decline, fell 18 percent, while longs climbed 0.8 percent.
“We’re not seeing a dramatic increase in those who think the market is going a lot higher,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “These were investors covering their vulnerability” to a rally, he said.
In other markets, net bearish wagers on U.S. ultra low sulfur diesel decreased 59 percent to 8,778 contracts, the least since June. Diesel futures surged 19 percent in the period. Net bullish bets on Nymex gasoline dropped 6 percent to 20,356 contracts as futures advanced 11 percent.