CFA Society Singapore
NEW YORK (Feb 28): Oil has been bound to the tightest price range in more than a decade, and yet hedge funds have never been so confident it will eventually rally.
Money managers boosted their bets on rising West Texas Intermediate prices to a record on speculation that the Organization of Petroleum Exporting Countries and its partners will manage to ease a global supply glut. America’s crude producers, which are increasing output, aren’t so sure. They’ve been hedging against price declines for this year and 2018.
Oil has traded above US$50 ($70.30) a barrel since OPEC and 11 other countries started trimming supply on Jan. 1, which has in turn helped fuel a revival in US shale drilling. American explorers have almost doubled the number of rigs targeting oil since May, according to Baker Hughes Inc. The mixed signals have locked WTI in its narrowest range since 2003 this month.
"I’m looking for prices to rise this year, but not above US$60, and the reason for the ceiling is the tremendous resilience of US shale," Tamar Essner, a New York-based energy analyst at Nasdaq Inc., said by telephone. "The market is very one-sided right now, which makes me nervous because that often precedes a reversal."
Hedge funds boosted their net-long position on WTI, or the difference between bets on a price increase and wagers on a decline, by 6% in the week ended Feb. 21, US Commodity Futures Trading Commission data show. WTI rose 1.6% to US$54.06 a barrel in the report week, and closed at US$54.05 on Monday.
"I’m perplexed to see the ongoing accumulation of length in a market that’s not rewarding it with higher prices," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by telephone. "This shows implied faith that the market will tighten in the future and that will push prices higher."
OPEC and its partners achieved 86% of their agreed cuts last month, the organization said last week. The group’s Joint Technical Committee concluded that producers “are on the right track towards full conformity” with supply cuts. They will probably need to keep output low once the accord expires in June in order to clear the glut, according to Total SA Chief Executive Officer Patrick Pouyanne and Citigroup Inc.’s head of commodities research, Ed Morse.
US crude inventories climbed to 518.7 million barrels in the week ended Feb. 17, the highest level in weekly data going back to 1982, according to the Energy Information Administration. Production rose to 9 million barrels a day in the period, the highest since April.
As stockpiles mount, producers are increasingly seeking protection against a price reversal. Their net-short position keeps getting closer to the record bearish stance reached in April of last year.
"Producers know the market as well as anyone," Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by telephone. "They’re worried about the deal holding for more than six months. It’s more likely than not that the market will tank if the deal’s not extended or there’s extreme cheating."
As for hedge funds, their net-long position in WTI increased by 23,299 futures and options to 413,637, the most in data going back to 2006. Longs rose 4.6% to an all-time high, while shorts slipped 7.5% to the lowest since July 2014.
"The hedge funds have piled on bullish positions," Yawger said. "The downside is that someday, if it looks like the OPEC deal is coming apart, the market can fall apart very quickly."
Speculators’ wagers on Brent crude, the international benchmark traded in London, also reached a record. Their net-long positions advanced by 26,210 contracts to 507,609, data from ICE Futures Europe showed.