Oil’s 50% Drop From 2014 High Stokes Faith in Rally

By Moming Zhou

Photographer: Shawn Baldwin/Bloomberg

Outlet pipes and fuel storage tanks are seen at the Zawiya oil refinery near Tripoli,... Read More

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The slump in oil that drove U.S. prices down as much as 50 percent from this year’s high is spurring the most bullish bet by hedge funds in four months.
Speculators expanded their net-long position in West Texas Intermediate crude by 14 percent in the week ended Dec. 16, U.S. Commodity Futures Trading Commission data show. Long wagers increased the most since February.
Money managers have increased their net-long position by 34 percent in three weeks, even as prices kept tumbling as OPEC ministers reiterated pledges to keep pumping. Their bullishness is also reflected in exchange-traded funds that track oil, which attracted the most money in four years this month.
“People are starting to feel that we not only hit the bottom but we are
turning around,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone Dec. 19. “The fundamentals haven’t really changed.”
WTI fell $7.89, or 12 percent, to $55.93 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report and touched $53.60, the lowest since May 2009.
Saudi Arabia’s Oil Minister Ali Al-Naimi said it’s “difficult, if not impossible” for his country and OPEC to give up market share, the Saudi Press Agency reported Dec. 18. The “temporary” instability in oil markets is being caused mainly by a slowing global economy, he was reported as saying.
“The oil market will recover,” Al-Naimi said yesterday at a conference in Abu Dhabi. “We are now in a provisional, correctional period,” Mohammed Al Sada, Qatar’s energy minister, said at the conference.

Slower Demand

The International Energy Agency on Dec. 12 cut its forecast for global demand next year and raised its estimate for non-OPEC supply. U.S. output, already at a three-decade high, will continue to rise, the Paris-based IEA said.
“Short-term supply is still stronger than demand,” Gareth Lewis-Davies, a London-based analyst at BNP Paribas SA, said by phone Dec. 18. “There is nothing that convinces me that we are not going to have a quite significant supply build in the first half of next year.”
The four biggest U.S. exchange-traded products tied to oil, including the United States Oil Fund (USO) and the ProShares Ultra Bloomberg Crude Oil, received a combined $859.3 million this month as of Dec. 18, according to data compiled by Bloomberg. It’s the most in any month since May 2010.

OPEC Meeting

Oil plunged 23 percent since Nov. 26, the day before the 12-nation Organization of Petroleum Exporting Countries decided to maintain its output target. The group pumped 30.6 million barrels in November, above its 30-million-barrel quota for a sixth month, according to data compiled by Bloomberg.
“OPEC is no longer relevant,” Francisco Blanch, head of global commodities and derivatives research for Bank of America, said on Bloomberg TV Dec. 17. “Saudi has pulled the plug and is letting the market balance itself.”
U.S. crude production reached 9.14 million barrels a day in the week ended Dec. 12, the most in EIA weekly data from 1983.
Net-long positions for WTI climbed by 26,455 to 217,723 futures and options in the week ended Dec. 16. Long positions gained 6.7 percent to 274,740. Short bets decreased 14 percent to 57,017.

Retail Gasoline

In other markets, bullish bets on gasoline rose 1.2 percent to 49,416 contracts. Futures tumbled 11 percent to $1.541 a gallon on Nymex in the reporting period.
Regular retail gasoline dropped 2.6 cents to average $2.409 Dec. 20, the cheapest since May 2009, according to AAA.
Bearish wagers on U.S. ultra low sulfur diesel increased 6.2 percent to 24,113 contracts as the fuel sank 6 percent to $1.96 a gallon.
Net-long wagers on U.S. natural gas fell 36 percent to 27,260 lots, the lowest since October. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Nymex natural gas dropped 0.9 percent to $3.619 per million British thermal units.
WTI for February delivery added 90 cents, or 1.6 percent, to $58.03 a barrel in electronic trading on the New York Mercantile Exchange at 11:59 a.m. Singapore time. Brent gained $1.18 to $62.56.
“These low prices are bringing value seekers out of the woodwork,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone Dec. 19. “But there is more oil continuing to enter into the market.”