Monday 08, October 2018 by Bloomberg

Investors pull back their wagers on oil’s rally

 

The run-up to $100 oil is giving some investors pause.

This year’s longest build-up of hedge-fund bets on higher Brent crude prices is faltering, with bulls retreating for the first time in six weeks. After fears of dramatic shortfalls from Iran sent the global benchmark on a tear and triggered speculation that it will reach three digits, the rally is cooling as Saudi Arabia and other major producers step in to fill the gap.

“Cooler heads are starting to prevail,” said Ashley Petersen, a senior oil market analyst at Stratas Advisors LLC. “Anyone that was worried they weren’t adequately prepared for higher prices maybe has re-positioned themselves to where they do feel prepared.”

Brent rose 20 per cent in seven weeks as speculation mounted over how big a supply gap US sanctions on Iran would leave in the market, with prices breaching $86 a barrel for the first time since 2014. But as tension eases, futures closed the week at about $84.

Mohammed Bin Salman, heir to the Saudi throne, said in an interview that the Kingdom is fulfilling promises to make up for Iranian crude supplies lost to American sanctions. His comments follow US President Donald Trump’s attack on the Organization of Petroleum Exporting Countries for letting prices rally. On Wednesday, the State Department urged OPEC to tap its reserve supplies.

The shortfall speculation “went from the initial point of half a million to a million barrels a day of losses from Iran and then somewhere around 10 days ago people started to say, ‘Oh my God! It might be two million barrels a day,” said Michael Lynch, president of Strategic Energy & Economic Research. Now, “people are starting to think, they may be able to do some workarounds and it sounds like the Saudis and Russians are willing to increase production,” he said.

Hedge funds’ net-long position—the difference between bets on higher prices and wagers on a drop—in Brent fell 2.9 per cent to 481,945 contracts for the week ended 2 October, following a 53 per cent jump over the previous five weeks, ICE Futures Europe data show. Longs fell 1.5 per cent, while shorts jumped 24 per cent, the most since May.

In the US, the restraint is deeper rooted. Pipeline constraints in the Permian Basin and rising stockpiles are keeping West Texas Intermediate crude at a wide discount to Brent. The spread is nearing $10 a barrel, more than double its level in mid-July.

“WTI is still being hamstrung by midstream constraints,” Stratas’ Petersen said. “It’s not going to benefit as much from this rally and some future rallies as Brent will, because it’s still dealing with these transport logistics.”

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