BLOOMBERG

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

 

by Dan Murtaugh and Lynn 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.


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.”


Drilling Decline
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 fell 25 cents to $56.90 at 8:52 a.m.
Monday, after capping a sixth weekly gain on April 24.


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.


High Inventories
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.


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.”


FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND
MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES
MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY
RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT
IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE
RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL
DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED
IN THE PRICE OF THE UNDERLYING FUTURES