The worst could be over for oil prices, if the whims of a growing number of speculators are anything to go by.
Hedge funds are taking their most bullish position on crude oil prices in two months. New data from the Commodity Futures Trading Commission shows that net-long positions on crude oil increased by 14,821 contracts, reaching a two-month high of 147,678 positions.
These swings in investor sentiment can move the price of crude. In recent weeks, we had seen an inordinately pessimistic view of crude oil, with short positions hitting their highest levels in years. Short betting pushed WTI below $40 per barrel late last month, with volatility off the charts. But speculators pushed the envelope too far, and once it became clear that short selling had become unsustainably high, a rally in prices became inevitable as short sellers covered their positions. Crude shot up by 27 percent in three days, even though very little happened in terms of actual news from the physical crude market. Related: Russian Oil Industry Braces For Tax Hike
Since then, prices have sort of leveled off in the mid-$40s per barrel for WTI. Now though, it appears that speculators think the worst is over. To be sure, it is not as if speculators think oil prices are about to surge. Net-short positions are still near multiyear lows. But hedge funds and other speculators are shrugging off predictions of $20 oil, and they are starting to take a brighter view of where oil prices may go.
And there is growing evidence that they might be right – that crude oil markets are, in fact, bottoming out.
Baker Hughes reported its third straight week of declines in the rig count. The number of active oil and gas rigs hit in the U.S. hit 842 for the week ending on September 11, or 1,089 fewer rigs than at this point a year ago. The rig count fell precipitously since oil prices started declining in the summer of 2014, but staged a brief rally after oil prices ticked back up this past spring. That led to fears of persistently low oil prices on expectations that U.S. oil output wouldn’t fall. However, production is falling (more on that below). And now that rig counts are down once again, speculators are coming to the realization that a deeper contraction in the U.S. shale industry is now very much underway. Related: Can The Saudi Economy Resist ‘Much Lower For Much Longer’?
More importantly, actual U.S. oil production is declining, and the declines appear to be accelerating. In June, the U.S. saw a decline of 100,000 barrels per day. In August, that figure leapt to a 140,000 barrel-per-day loss. The latest data from the EIA for the week ending on September 11 shows that production is down to 9.11 million barrels per day (mb/d), which is about 0.5 mb/d lower than the peak exhibited in April of this year. Oil in storage was also down for the week, falling by 2.1 million barrels. No doubt the decline will continue, and could even pick up pace in the coming months.
Global oil demand also continues to rise. The IEA again revised its demand projection for 2015 upwards, with consumption expected to grow by 1.7 mb/d, a five-year high. “The market’s not as oversupplied as we think it is,” David Pursell, managing director at Tudor Pickering Holt & Co., told Bloomberg in an interview.
The long-term picture shows even stronger signs of bullishness. For example, it is unlikely that Iraq will be able to reach its ambitious production targets for the future, and because energy forecasters like the IEA are counting on Iraq to make up a large share of global production growth in the coming decades, the failure to reach those targets could leave the world short of supply. The same can be said for Brazil. In June, Petrobras acknowledged it will be unable to meet its production goals as well. The several million barrels per day lost between just these two countries alone mean that the long-term supply picture looks a lot tighter than we once thought. Related: Iran Deal May Redefine The Middle East
But it goes beyond Iraq and Brazil. Around the world, an estimated $1.5 trillion worth of oil and gas investment may not be viable, at least at today’s prices, according to a new report from Wood Mackenzie. The report concludes that $220 billion worth of investment has already been scrapped, and another $20 billion could be cancelled as well. The number of new oil and gas projects to be approved in 2016 could be around one-fifth of the annual average.
Other market watchers concur. “The low oil prices are taking their toll, the main shale oil producing regions in particular likely to suffer lasting damage,” Commerzbank concluded in another report. Lower production over the longer-term could send oil prices up.
However, it is short-term market conditions that dictate the huge gyrations in crude oil prices. And for now, based on the positions of oil speculators, prices may have bottomed out.
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By Nick Cunningham of Oilprice.com
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