Hedge Fund Crude Bets Tumble Amid Surging Global Supply: Energy

Aug 25, 2014 6:13 pm ET

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Aug. 25 (Bloomberg) -- Speculators are the least bullish on U.S. crude oil prices in 16 months as refinery maintenance weakens demand at a time when Libya and Iraq are swelling global supplies.

Futures dropped a fifth consecutive week after money managers reduced net-long positions in West Texas Intermediate, the U.S. benchmark grade, by 14 percent in the seven days ended Aug. 19, the Commodity Futures Trading Commission said.

Prices sank below $95 on Aug. 19 for the first time in seven months as U.S. air strikes in Iraq helped reverse the advance of Islamic State fighters and the country’s Kurds work to increase oil shipments. Libyan output climbed last week and exports resumed from the port of Es Sider. Refineries in the U.S. typically schedule work for September and October, when demand for gasoline declines after the summer peak, and before consumption of heating fuel picks up during winter.

“It’s hard not to be bearish with the Kurds boosting shipments and more oil coming out of Libya,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone Aug. 22. “The market isn’t getting any support from the geopolitical side now and supplies continue to increase.”

Crude declined 3 percent to $94.48 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. It slid 30 cents to end at $93.35 a barrel today.

Air Strikes

President Barack Obama will consider air strikes in Syria if needed in the battle against the Islamic State terrorists who beheaded an American journalist, deputy national security adviser, Ben Rhodes, told reporters Aug. 22.

The killing “appears to have galvanized the U.S., western Europe and other countries to adopt a unified stance against the guerrillas,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone Aug. 22. “Not only have they have lost the ability to cut Iraqi oil exports but the Kurds have gained the ability to increase theirs.”

Iraq’s Kurds are working to quadruple the capacity of their oil-export pipeline within months, an official with knowledge of the situation said, asking not to be named because of policy. The Kurdistan Regional Government, or KRG, more than doubled daily capacity to 300,000 barrels on its link to Turkey as of Aug. 21, and is considering another increase that would allow the line to move 500,000 barrels a day to the Mediterranean port of Ceyhan within as little as three months, he said.

Libyan Production

In Libya, production increased to 612,000 barrels a day on Aug. 21, according to Mohamed Elharari, a spokesman for National Oil Corp. Two cargoes have loaded at the reopened port of Es Sider, according to the NOC. The North African country pumped 400,000 barrels a day in July, according to a Bloomberg survey of oil companies, producers and analysts.

The increase in crude supply from Libya and Iraq comes as the EIA forecasts U.S. production will reach 9.28 million barrels a day next year, the highest annual average since 1972.

The EIA in its Short-Term Energy Outlook released Aug. 12 estimated U.S. refineries will process 15.25 million barrels a day of crude in October, down from 16.42 million in July.

“WTI is weakening because we are approaching refinery turnaround season,” said Finlon.

Price Floor

The price rout in Brent crude, the European benchmark used to value more than half the world’s oil, is coming to an end as the flow of West African crude to Asia helps disperse a glut, banks including Societe Generale SA, BNP Paribas SA and DNB ASA said.

A “price floor is forming” close to $100 a barrel for Brent as the surplus of Nigerian supplies is whittled away, Societe Generale said in a report Aug. 21. The incentive for sending cargoes from the region to buyers in Asia is at its strongest in four years, data from PVM Oil Associates Ltd. show. Chinese and Indian refiners bolstered purchases of West African crude to the highest in at least three years, a Bloomberg News survey of traders last week indicated.

Hedge funds and other speculators cut bullish bets on Brent to the lowest level in two years, data released today by the ICE exchange show. Money managers’ wagers that prices will rise, in futures and options combined, outnumbered wagers that prices will fall by 63,079 contracts in the week ended Aug. 19, the least since July 10, 2012.

Net-longs for WTI slipped by 30,225 to 188,589 futures and options, the lowest level since the seven days ended April 23, 2013. Long positions fell 4.2 percent to 258,246, the least since June 2013. Shorts climbed 37 percent to 69,657, the highest level since December 2012.

Gasoline Bets

In other markets, bullish bets on gasoline fell 14 percent to 28,431 futures and options combined, the least since February. Futures declined 1.4 percent to $2.6954 a gallon on Nymex in the reporting period. They dropped 0.91 cent to $2.7384 on Aug. 22.

Regular gasoline at the pump, averaged nationwide, slid 0.2 cent to $3.435 a gallon yesterday, the lowest since Feb. 25, according to Heathrow, Florida-based AAA, the largest U.S. motoring group.

“I don’t see a lot of upside in the gasoline market,” Tim Evans, an energy analyst at Citi Futures in New York, said by phone Aug. 22. “There may be a short-term spurt of demand but the market’s looking ahead to weaker fourth-quarter demand.”

Bearish wagers on U.S. ultra low sulfur diesel fell 40 percent to 7,828 contracts. The fuel decreased by 2.79 cents to $2.8171 a gallon in the report week.

Natural Gas

Net-long wagers on U.S. natural gas rose 14 percent to 149,608, the first gain since June. 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 2.4 percent to $3.877 per million British thermal units during the report week. It fell 1.3 percent to $3.84 Aug. 22.

Members of the Organization of Petroleum Exporting Countries may curb output to keep prices from dropping further, BNP Paribas and Commerzbank AG aid in reports last week. OPEC ministers kept their target unchanged at 30 million barrels a day on June 11 in Vienna. The group is scheduled to meet next on Nov. 27.

“With the increase in Kurdish shipments, Libyan output and rising production here, OPEC will have to consider taking some action to support prices,” Finlon said.