Oil Investors Raise the Bet on Higher Prices and Lose

  • Speculator’s WTI net-longs up 4.6%, third-straight gain: CFTC
  • U.S. production climbs to highest level since August 2015: EIA

The shale boom is making it hard to be an oil optimist. 

While hedge funds raised their bets on rising prices, the market tanked. Money managers boosted wagers on higher West Texas Intermediate crude for a third week as of April 18, U.S. Commodity Futures Trading Commission data show. The next day, futures tumbled after a report showed U.S. output rose for a ninth straight week. Prices continued to fall even after Saudi Arabia said exporters have reached an initial deal to extend production curbs past June.

"Based on what happened the rest of the week, this will be the last hurrah," said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. "There was a narrative that the OPEC/non-OPEC cuts would be effective and balance the market. The narrative unraveled by the end of the week."

Oil futures touched an 18-month high on the first day of trading this year as an accord between the Organization of Petroleum Exporting Countries and 11 other producers to cut output for six months came into effect. The increase in prices had the unintended effect of spurring drilling in U.S. shale basins.

Money managers’ WTI net-long position, or the difference between bets on a price increase and wagers on a drop, climbed 4.6 percent in the week ended April 18, according to the CFTC. WTI slipped 1.9 percent to $52.41 a barrel in the report week, and dropped 0.8 percent to $49.23 on Monday, the lowest close since March 28.

Head Spin

"It looks like those new bullish positions added over three weeks are what are known as weak longs," Mike Wittner, head of commodities research at Societe Generale SA in New York, said by telephone. “It looks like they exited later in the week, accelerating the market move lower. The managed-money players get in and out of the market so fast now that it will make your head spin."

U.S. crude production rose by 17,000 barrels a day to 9.25 million in the week ended April 14, the Energy Information Administration said. Crude supplies fell by 1.03 million barrels, the second decline after rising to a record 535.5 million barrels at the end of March. U.S. explorers added five oil rigs last week to cap the longest stretch of gains since 2011, Baker Hughes Inc. data show.

The net-long position in WTI rose by 14,135 futures and options to 323,364. Longs advanced 1.7 percent, while shorts dropped 11 percent.

Net-long positions in Brent oil decreased. Speculators’ wagers on the grade, the global benchmark traded in London, slipped by 9,811 contracts to 427,433, the first decline in three weeks, data from ICE Futures Europe showed.

"I’m not entirely surprised by a small increase in net speculative length given that data was as of April 18," said Nicholas Koutsoftas, co-portfolio manager of commodities at Cohen & Steers Capital Management Inc. in New York. "I would expect a decrease when they release this week’s data next Friday."

Goldman Sachs Group Inc. said there’s no fundamental evidence to justify this week’s selloff in oil prices. The bank finds the drop in U.S. crude supplies encouraging and expects the declines to accelerate through the second quarter amid OPEC cuts and demand growth, analysts including Damien Courvalin and Jeffrey Currie said in a report dated April 20.

Missed Goal

OPEC and its allies have failed after three months of cuts to meet their goal of reducing global supplies below the five-year historical average, Saudi Arabian Oil Minister Khalid Al-Falih said last week. 

Inventories in the Organization for Economic Cooperation and Development -- which consumes about half global supply -- fell only slightly in February and remained 330 million barrels above the five-year average, bigger than the surplus of 286 million at the end of December, International Energy Administration data show.

"We’re very comfortable with $60 to $65 range by year’s end," Koutsoftas said by telephone. "If they hold on, OPEC could reach their goal" of seeing OECD inventories normalizing back to their five-year average.

    Before it's here, it's on the Bloomberg Terminal.