Brent Oil Bull Bets Fall Most Since January as Iraq Fears Ease

Jul 21, 2014 10:35 am ET

July 21 (Bloomberg) -- Hedge funds and other money managers cut net bullish bets on Brent crude by the most since January as concerns eased that Iraq’s oil output will be disrupted by a militant uprising.

Speculative bets that prices will rise for Brent, in futures and options combined, outnumbered short positions by 151,981 in the week to July 15, according to data from the ICE Futures Europe exchange. The 25 percent slump was the biggest since the week to Jan. 7. Prices for the North Sea benchmark fell 2.7 percent to $106.02 a barrel in the period.

The Islamic State, an al-Qaeda breakaway group, last month took control of Mosul, the largest city in the country’s north, as well as other towns. While the price of crude rose immediately after the violence escalated, it then slumped again because fighting hasn’t spread to the south of the country, where most of Iraq’s oil is produced. Russian energy supplies haven’t been interrupted by tensions with Ukraine after a Malaysian Air flight was downed on July 17.

“Investors have realized that the risk on the back of the situation in Iraq is fairly limited,” Jens Naervig Pedersen, a commodities analyst at Danske Bank A/S, said by phone from Copenhagen today. “That’s why we’ve seen oil prices decline and investors cut net-long positions.”

Brent crude was little changed at $107.37 as of 3:02 p.m. in London today, lower than when Mosul was taken. Supplies from the northern Iraq haven’t been hindered either because those deposits are being protected by Kurds who control oilfields including Kirkuk, the nation’s fourth largest.

Oversupplied Market

“A lot of these bets were taken on the back of Iraq, and that so far hasn’t played out,” Torbjoern Kjus, a senior analyst at DNB ASA in Oslo, said by phone today. “The market has been quite oversupplied.”

Gasoline’s crack, a measure of refining profit, was at $9.63 a barrel today in Europe, according to data from London- based broker PVM Oil Associates Ltd. That’s down 28 percent from June 30.

Brent earlier this month moved into contango, a situation where futures for prompt delivery are cheaper than deferred contracts. The structure sometimes shows an immediate oversupply of oil.

“It was the extremely poor refining margins that should have been a warning signal,” Kjus said. “Suddenly we saw the market flip into contango because there wasn’t enough physical demand from refiners.”