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Record Betting on Oil's Rally Begs Question: How Far Can It Go?

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  • Hedge fund bets on rising WTI and Brent reach all-time high
  • Long positions skyrocket but warnings of a retreat loom

IEA's Birol on Oil Prices, Venezuela, Future of Oil

Another week of rising oil price and another record for money manager bets on gains. But can it last?

With wagers on rising West Texas Intermediate and Brent crude futures mounting to new highs and the global benchmark hurtling through $70 in the face of depleting stockpiles, the bulls seem to have control of the market. But, warnings of a retreat are coming into view.

“The question in my mind is, how far can this market go?” said Rob Haworth, who helps oversee $150 billion in assets at U.S. Bank Wealth Management in Seattle. The higher oil prices go, the more likely it is OPEC will have second thoughts on their supply cuts and that shale production will rise, he said.

So far, so good.

The Organization of Petroleum Exporting Countries is committed to keeping its output curbs in place for the rest of year, United Arab Emirates Energy Minister Suhail Al Mazrouei said last week. The U.S. supply picture has shown shrinking inventories, with storage at Cushing, Oklahoma below the five-year average.

The global stockpile surplus has almost vanished and demand growth is strong enough to absorb increases in U.S. crude output, according to Energy Aspects Ltd.’s chief oil market analyst, Amrita Sen.

But Goldman Sachs Group Inc. warns that OPEC would try to talk down an oil rally above $70 a barrel to cushion the impact on the global economy and rival supplies. Russian Energy Minister Alexander Novak said Friday producers regularly talk about options for winding down the supply-reduction deal.

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Iran’s Oil Minister Bijan Namdar Zanganeh even admitted that OPEC doesn’t like crude above $60 because of shale oil. The statement comes at the same time the U.S. government is forecasting output this year and next to reach record levels.

Even though U.S. explorers have hinted they’ll stick to conservative spending budgets, the oil rig count rose by 10 last week, the biggest addition since June. And they have been hedging like never before, meaning they are more protected than ever to keep producing even if prices drop.

“Will these producers be disciplined or not? There really isn’t a clear read on that. There is this dichotomy between what people are saying and what their actions are suggesting,” said Tamar Essner, an analyst at Nasdaq Inc. in New York. “Hedging is at very high levels. The rig count is going up. The actions tell a slightly different story than the words.”

A number of experts don’t seem to be getting too excited over crude’s recent rally. It’s premature to expect to see a further price rise, at least until the market gains a better grasp of the pace of U.S. production growth, according to RBC Capital Markets. UBS Group AG cites the potential of record output weakening prices over the course of the year.

Bank of America Merrill Lynch’s head of commodities research, Francisco Blanch, said in order to see prices remain near $70 a barrel, heightened demand momentum needs to continue for the entire year.

Hedge funds increased their WTI net-long position -- the difference between bets on a price increase and wagers on a drop -- by 10 percent to 437,770 futures and options during the week ended Jan. 9, the highest in data going back to 2006, according to data from the U.S. Commodity Futures Trading Commission on Friday. Longs surged by 8.5 percent and shorts tumbled by 11 percent to the lowest since July 2014.

The Brent net-long position climbed 1.5 percent to a record 574,152 contracts, according to data from ICE Futures Europe. Longs increased 2.5 percent to an all-time high, while shorts rose 11 percent to the highest level since October.

The net-short position of swap dealers, an indication of hedging, increased for a 13th week to a fresh record, according to the CFTC data.

In the fuel market, money managers raised their net-long position on benchmark U.S. gasoline by 13 percent. Meanwhile, the net-bullish position on diesel rose by 4.8 percent to the most bullish on record.

A closely watched technical indicator shows crude might take a step back. WTI’s 14-day relative strength index hovered above 70 last week, signaling the commodity is overbought.

“We’re at the point where folks are getting nervous,” as the market is overbought, James Williams, president of London, Arkansas-based energy researcher WTRG Economics, said by telephone. “There are so many people that are long.”

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