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Wall Street Bets On Oil Price Rally

Wall Street Bets On Oil Price Rally

If the whims of speculators are anything to go by, then oil markets are poised for a rebound.

Data from the Commodity Futures Trading Commission show that bullish positions on WTI have reached their highest levels in eight months. Speculators make bets on the price of crude – long or short – depending on where they think prices are heading. Not since the end of the summer in 2014 have so many investors put money on the line, betting on a price rise.

Obviously, elite investors are not always right. Few saw the bust coming. But the mounting belief that the worst is over for oil provides a bit of evidence that prices could be on the mend. Related: Is This Where Investors Should Be Looking When Oil Recovers?

That is also reflected in lending and equity positions in actual oil companies. Sensing a massive opportunity to buy up valuable assets on the cheap, big money is piling into shale companies. Banks, hedge funds, and other big investors are lending, buying equity, and purchasing assets during the down cycle. Around $12 billion in new stock was issued in oil and gas in the first quarter of 2015 according to Bloomberg, the highest amount in eight years.

Such an astonishing level of new investment during a period of depressed prices shows that the markets, despite major concerns from corporate executives, have not soured on oil and gas in the least. Oil prices have more than halved from the 2014 peak, which has destroyed profits for many drillers. It is a volatile business to be sure, and more pain can be expected in the coming weeks as companies begin reporting first quarter earnings, but Wall Street’s actions so far this year demonstrate the enormous appetite for oil and gas investment. Related: OPEC Says US Oil Boom Will End This Year

On the other hand, all the new equity shows that upstream producers are desperate for new cash, hoping to weather the downturn and survive long enough until oil prices rebound. And markets have a sort of self-correcting ability – if increases in oil prices appear to be driven by speculators, prices can “correct” downwards again.

Nevertheless, with prices starting to tick up, many companies just might stave off the worst. For the investors brave enough to jump in during uncertain times, there could be a big pay off if prices continue to climb. Related: The Latest Media Attempts To Suppress Oil Prices

Even if they do not, a lot of new lending is coming with strings attached. High interest rates, and preferred positions that put lenders at the front of the line in the event of a default, mean that the risk of offering new credit is smaller than it appears.

Regardless, if there is anything to be gleaned from market behavior, it is that Wall Street thinks that an oil price rally is finally here.

By Charles Kennedy for Oilprice.com

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Leave a comment
  • Lee James on April 20 2015 said:
    We find differing take-aways from what has been taking place in the petroleum industry. If these new petroleum lenders, investors and buyers are not typically involved in the Energy sector, they may just be looking for greener pastures.

    Price-to-earning ratios are high outside of the Energy sector. Lots of folks believe what is going on in Energy is business as usual. Downturns are self-correcting. Money is cheap; why not jump into Energy?

    What if something more structural is going on in the Energy Sector? We have higher operating costs at home and abroad. Energy regulation is more of a risk. Maybe by Earth Day 2016 we will see more progress, even though this is a record-setting year for reducing U.S. carbon emissions. We still spend a lot on fossil fuels -- and less than half of that cost is know to us as consumers -- we pay later, and think someone else pays the freight on accidents and harmful-emissions.

    Maybe price carbon in 2016? Make it a polluters-pay, back-to-taxpayers revenue-neutral price on carbon?
  • joe rice on April 20 2015 said:
    Awesome... The 99.99% percent of the middle class not in the oil business on Wallstreet gets to pay higher gas prices to cover the bets of Wallstreet billionaires...Nice

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