Hedge Funds Bet Oil Will Fall Further

By Mark Shenk

Photographer: Matthew Staver/Bloomberg

An Extraction Oil and Gas LLC drilling rig stands outside of Windsor, Colorado.... Read More

Related

• Oil May Rebound After Falling to $40, Fesharaki Says
• Oil Price May Drop to Low $30 Range, BofA's Blanch Says
• Lower Oil Prices to Force Energy Deals: BofA’s Meissner

Hedge funds boosted bearish wagers on oil to a four-year high as U.S. supplies grew the most since 2001.
Money managers increased short positions in West Texas Intermediate crude to the highest level since September 2010 in the week ended Jan. 20, U.S. Commodity Futures Trading Commission data show. Net-long positions slipped for the first time in three weeks.
U.S. crude supplies rose by 10.1 million barrels to 397.9 million in the week ended Jan. 16 and the country will pump the most oil since 1972 this year, the Energy
Information Administration says. Saudi Arabia’s King Salman, the new ruler of the world’s biggest oil exporter, said he will maintain the production policy of his predecessor despite a 58 percent drop in prices since June.
“There’s been a rush to call a bottom,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone Jan. 23. “The fundamentals are still stacked against a rebound.”
WTI rose 50 cents, or 1.1 percent, to $46.39 a barrel on the New York Mercantile Exchange during the CFTC report period. The U.S. benchmark fell 44 cents, or 1 percent, to $45.15, the lowest settlement since March 11, 2009. Brent slipped 63 cents, or 1.3 percent, to end the session at $48.16.
Salman Bin Abdulaziz Al Saud ascended to the throne after King Abdullah died last week. The kingdom pumped 9.5 million barrels a day in December as members of the Organization of Petroleum Exporting Countries exceeded their 30 million-barrel daily target for a seventh month.

U.S. Production

“I don’t see any major catalyst from either the supply or demand side that will send prices higher this year,” Stewart Glickman, an equity analyst at S&P Capital IQ in New York, said by phone Jan 23. “It looks like $50 crude is the new reality that we’ll have to get used to.”
Production in the U.S. will be slow to decline as improvements in drilling technology boost well output even as companies drill less. Oil production per rig from new wells in the Bakken in February will be double what it was three years ago, the EIA said Jan. 12.
The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, or fracking, which has unlocked supplies from shale formations including the Eagle Ford and Permian in Texas and the Bakken in North Dakota.
Drillers idled 49 U.S. oil rigs last week, bringing the total to 1,317, the lowest level in two years, Baker Hughes Inc. (BHI) said on its website Jan. 23. It was the seventh weekly decline.

Short Options

“The fundamentals are terrible,” Mike Wittner, head of oil research at Societe Generale SA in New York, said by phone Jan. 23. “The drop in the rig count will have a limited impact. We’re going to see huge builds during the first quarter worldwide.”
Short positions in WTI increased by 6,262 contracts to 94,203 futures and options in the week ended Jan. 20, CFTC data show. Long positions dropped 0.3 percent. Net-long positions fell 3.3 percent to 216,704. Producers increased net-short positions by 7,623 to 132,143 contracts, the most since December 2011.
In other markets, bullish bets on gasoline advanced 5.8 percent to 39,418 contracts, the first gain in five weeks. Futures increased 3.5 percent to $1.3128 a gallon on Nymex in the reporting period.

Pump Prices

Retail gasoline, averaged nationwide, slid to $2.033 a gallon Jan. 25, the lowest since March 2009, according to Heathrow, Florida-based AAA, the largest U.S. motoring group.
Bearish wagers on U.S. ultra low sulfur diesel increased 2.3 percent to 29,943 contracts, the most since the period ended Nov. 4. The fuel slipped 0.4 percent to $1.6266 a gallon in the report week.
Net-short wagers on U.S. natural gas decreased 32 percent to 11,967 lots. 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 3.8 percent to $2.831 per million British thermal units during the report week.
“We’ve been here before,” said Wittner. “There have been points when it looked like it was stabilizing only to then take another leg lower.”