Growing Oil Glut Shows Investors There’s Nowhere to Go But Down

  • Speculators add record number of bearish WTI crude wagers
  • Crude, gasoline supply at highest seasonal level in decades

Oil in Bear Market: Three Charts That Tell the Story

Money managers have never been more certain that oil prices will drop.

They increased bets on falling crude by the most ever as stockpiles climbed to the highest seasonal levels in at least two decades, nudging prices toward a bear market. The excess supply hammered the second-quarter earnings of Exxon Mobil Corp. and Chevron Corp. Inventories are near the 97-year high reached in April as oil drillers boosted rigs for a fifth consecutive week.

“The rise in supplies will add more downward pressure,” said Michael Corcelli, chief investment officer at Alexander Alternative Capital LLC, a Miami-based hedge fund. “It will be a long time before we can drain the excess.”

Hedge funds pushed up their short position in West Texas Intermediate crude by 38,897 futures and options combined during the week ended July 26, according to the Commodity Futures Trading Commission. It was the biggest increase in data going back to 2006. WTI dropped 3.9 percent to $42.92 a barrel in the report week, and closed at $40.06 Monday, the lowest since April 18.

WTI has dropped 22 percent from it’s June closing high, meeting the common definition of a bear market. The contract fell by 14 percent in July, the biggest monthly drop in a year.

U.S. crude supplies rose by 1.67 million barrels to 521.1 million in the week ended July 22, according to U.S. Energy Information Administration data. Stockpiles reached 543.4 million barrels in the week ended April 29, the highest since 1929. Gasoline inventories expanded for a third week to 241.5 million barrels, the most since April.

“The flow is solidly bearish,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “It reflects a recognition that the market is, at least for the time being, oversupplied.”

Exxon and Chevron missed profit and production estimates last quarter, earnings data showed July 29. The biggest U.S. energy companies followed Royal Dutch Shell Plc and BP Plc in posting lower profits as crude’s collapse continued to weigh on the industry.

Rig Count

U.S. oil explorers have boosted the number of active rigs by 58 since the start of June to 374, with three added last week, Baker Hughes Inc. said July 29. American producers have expanded drilling in recent weeks after idling more than 1,000 oil rigs since the start of last year.

Money managers’ short position in WTI rose 28 percent to 180,134 futures and options, CFTC data show. Longs, or bets on rising prices, increased 0.9 percent, while net longs tumbled 23 percent to the lowest since February.

In the Brent market, money managers trimmed bullish bets by 9,072 contracts in the week, according to data from ICE Futures Europe. Bets that prices will rise outnumbered short positions by 288,536 lots, the least since February, the London-based exchange said.

In other markets, net-bearish bets on gasoline surged to a record 5,078 contracts. Gasoline futures fell 2.2 percent in the report week. Net-long wagers on U.S. ultra low sulfur diesel dropped 23 percent to 12,742 contracts, the lowest since May. Futures slipped 4.2 percent. 

U.S. refineries cut operating rates in the week ended July 22, the EIA said. The processors usually don’t begin to curb output until August as the summer driving season nears its end. The crack spread, a measure of profit margins from refining crude into fuel, fell the past four months, data compiled by Bloomberg show.

There’s further room for crude prices to drop amid expectations for worsening of refining margins, according to a Barclays Plc report e-mailed Aug. 1. Although refineries along the U.S. East Coast have already begun to trim operations "we think there is more pain to come for refineries," analysts including Michael Cohen said in the report.

Refineries typically slow during September and October to perform maintenance. Over the past five years, their demand for oil has dropped an average of 1.2 million barrels a day from July to October.

“Money managers are net short gasoline by a record amount,” Evans said. “I wouldn’t be surprised if the net shorts increased for another week, but on an intermediate perspective, you have to watch out. Gasoline looks oversold given its historic behavior.”

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