Hedge Funds Least Bullish on Brent in 2 Years as Risk Wanes

Aug 18, 2014 3:14 pm ET

(Updates prices in fifth paragraph.)

Aug. 18 (Bloomberg) -- Hedge funds cut bullish bets on Brent crude to the lowest level in two years as recovering production in Libya and a diminished threat to Iraqi output compounded concerns that the global market is oversupplied.

Money managers reduced overall bets that Brent will advance to the lowest since July 2012, data from the London-based ICE Futures Europe exchange showed today. Production in Libya increased as it prepared to re-open its biggest oil port. Iraq’s most important dam was taken back from Islamist rebels, according to the Iraqi military, allaying concerns that oil fields further south could be disrupted. The price used by OPEC for assessing its crude sales slipped below $100 a barrel for the first time in 14 months.

Brent crude futures have signaled for the past six weeks that immediate supplies are exceeding demand, with the front- month contract trading at a discount, or contango, to later deliveries. This price structure erases the return traders could earn when successive monthly contracts are cheaper, undermining demand among financial investors, according to Saxo Bank A/S.

Dreaded Contango

“It’s oversupply,” Ole Sloth Hansen, an analyst at Saxo Bank in Copenhagen, said by e-mail. “The Atlantic basin has seen the return of the dreaded contango, which has created headwinds for passive, long-only investors as well as for hedge funds.”

Brent futures dropped 1.9 percent to $101.60 a barrel today, the lowest settlement since June 25, 2013.

Speculative bets that prices will rise, in futures and options combined, outnumbered wagers that prices will fall by 72,079 contracts in the week ended Aug. 12, the weekly Commitments of Traders report from the London-based exchange showed. That’s 26 percent less than the previous week, and reduces net-long positions to the least since July 10, 2012.

Short positions among money managers at 119,199 contracts are at their highest level since the start of ICE’s data, which extends back to 2011. This means prices are more prone to rebound sharply if demand recovers, because traders would need to close those positions by buying futures, Saxo’s Hansen said.

The International Energy Agency, a Paris-based adviser on energy policy to 29 developed nations, said on Aug. 12 that a supply “glut” is shielding prices against inflamed tensions in the Middle East and North Africa. Global demand growth sagged to its weakest in two years in the second quarter, the agency said.

OPEC Recovers

Production losses in OPEC nations have narrowed to the lowest level in 16 months, at 1.6 million barrels a day, Energy Aspects Ltd., a consultant based in London, said in a report today.

In Libya, daily output expanded to 540,000 barrels yesterday from 415,000 on Aug. 14 as the country prepares to ship from Es Sider for the first time in more than a year, said Mohamed Elharari, a spokesman for National Oil. Es Sider was one of two export terminals handed over to government control last month after being occupied by rebels seeking self-rule in the eastern regions.

Kurdish forces, also known as Peshmerga, and government anti-terrorism units “with joint air support, have taken over the Mosul Dam entirely,” Iraqi military spokesman Qassim Ata said on state-sponsored Iraqiya television. Abo Maan Al-Taie, a spokesman for Sunni tribes supporting the militants, said that fighting continued on the eastern side of the dam. Iraq is the second-biggest producer in the Organization of Petroleum Exporting Countries.

The average price of crude sold by OPEC dropped below $100 a barrel, a price level favored by the group, for the first time since June 26, 2013, data from the group showed. The OPEC basket is a weighted average of the main export grade from each of the group’s 12 members. Saudi Arabian Oil Minister Ali Al-Naimi has said that $100 a barrel is a suitable level for consumers and producers.

There is unlikely to be any immediate supply cut from Saudi Arabia or other OPEC members while prices remain above $90 a barrel, according to Bloomberg oil strategist Julian Lee. The observations he makes are his own.

--With assistance from Mark Shenk in New York.