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Oil Bears Routed by Spring Thaw in Prices as Drill Rigs Sit Idle

Bloomberg

by Dan MurtaughLynn Doan
7:01 PM EDT
April 26, 2015

Speculators pulled bearish oil bets at the fastest pace on record as Saudi Arabia renewed strikes on Yemen and U.S. output slowed.

Hedge funds reduced their short position in West Texas Intermediate crude by 32 percent in the seven days ended April 21, driving the net-long position to the highest since July, U.S. Commodity Futures Trading Commission data show. Bullish bets on Brent increased to the highest in at least four years.

A record drop in rigs drilling for crude reduced production even as demand rose, boosting speculation that WTI has found a floor after the biggest rout since 2008. A 32 percent rally since March was also stoked by concern that the conflict in Yemen may disrupt traffic through the world’s fourth-busiest channel for shipping oil.

“The falling rig count and the reduction we’re starting to see in output shows that the bottom has in fact been installed,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone April 24. “A lot of people are throwing in the towel.”

WTI futures rose $1.97 to $55.26 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. They slipped 13 cents to $57.02 at 1:11 p.m. Monday, after capping a sixth weekly gain on April 24.

Drilling Decline

U.S. drillers have idled 56 percent of oil rigs since October, according to Baker Hughes Inc.

That helped bring down crude production, which dropped to 9.37 million barrels a day in the seven days ended April 17, the lowest level in six weeks, according to preliminary data from the Energy Information Administration.

In the same week, U.S. refineries used 16 million barrels a day of crude, the highest seasonal level in weekly data going back to 1989.

Plants have increased crude demand by an average of 915,000 barrels a day in May through July over the past five years. The higher rates will help meet growing fuel demand. The EIA this month increased its estimate for 2015 gasoline consumption by 70,000 barrels a day.

Refinery Demand

The higher demand from refiners is easing concern that U.S. crude supplies will fill up storage tanks. Stockpiles rose by 5.32 million barrels to 489 million, the highest since 1930.

The reduction in short bets could leave the market in an overbought position, given the high inventory levels, Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone April 24. “It may have been the bears running for cover last week, but that leaves the longs more vulnerable.”

Net-long positions in WTI rose by 36,058 to 267,614 futures and options in the week ended April 21, the highest level since July 29. Long positions rose 0.2 percent to 342,276 and short holdings dropped by 35,311, the most in data going back to 2010, to 74,662 contracts.

Funds increased net net longs in Brent by 3.2 percent to 271,929, the highest in data extending back to January 2011, ICE Futures Europe said.

In other markets, net bullish bets on gasoline jumped 43 percent to 23,493. Futures rose 2.8 percent to $1.8881 a gallon on Nymex in the reporting period.

The U.S. average retail price of regular gasoline gained 0.4 cent to $2.536 a gallon Sunday, the highest level since December, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group.

Net bearish wagers on U.S. ultra low sulfur diesel decreased 15 percent to 19,441 contracts. The fuel rose 2.9 percent to $1.8532 a gallon.

Yemen Conflict

Net-short wagers on U.S. natural gas rose 3.6 percent to 101,506. The measure includes an index of four contracts adjusted to futures equivalents. Nymex natural gas climbed 1.8 percent to $2.575 per million British thermal units during the report week.

Aircraft from a Saudi-led coalition attacked Houthi rebel militia and troops allied with former President Ali Abdullah Saleh north of Aden, a southern port city in Yemen, the Saudi-owned Al Arabiya television channel reported April 23.

Traffic in the Bab el-Mandeb strait off the coast of Yemen trails only the Strait of Hormuz, the Strait of Malacca and the Suez Canal, according to the EIA.

“There’s concern that the violence in Yemen could spill across into Saudi Arabia,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said by phone April 23. “A decline in supply and the upward projection in demand would get the oil market in balance faster than expected.”

http://www.bloomberg.com/news/articles/2015-04-26/oil-bears-routed-by-spring-thaw-in-prices-as-drill-rigs-sit-idle