Hedge funds and other money managers expanded their bullish bets on oil prices last week amid signs that U.S. shale growth is slowing, the global oil market is further tightening, and oil demand could be resilient in the coming months.
Portfolio managers increased their combined net long position—the difference between bullish and bearish bets—in the six most important oil contracts by 37 million barrels in the week to March 26, according to the latest exchanges reports compiled by Reuters market analyst John Kemp.
The net long increased thanks to the opening of 33 million barrels of bullish positions and a drop by 4 million barrels in the short positions.
In the two most important oil contracts, money managers boosted their net long position in WTI by 29 million barrels and increased the net long position in Brent by 13 million barrels in the week ending March 26, according to exchanges data compiled by Kemp.
Hedge funds, therefore, continued their bullish positioning in the most recent reporting week after they had returned buying oil in the week prior, following a hesitant pause earlier in March.
Fund managers have several reasons to be more bullish on oil prices than they were at the beginning of last month.
First, U.S. crude oil production growth has stalled, mostly as a result of the oil price plunge in the fourth quarter of 2018, dissipating some of the fears that U.S. oil is set to flood the oil market and offset OPEC and allies’ production cuts.
The latest EIA data showed that average daily crude oil production in the U.S. slipped in January for the first time since May 2018.
The rig count in the U.S. dropped for a second week in a row last week, with the oil and gas rig count now just up by 13 from this time last year. Related: Reuters: OPEC’s Oil Production Drops To Lowest Since 2015
“Since mid-November, the number of active oil rigs in the US has declined by 72, and this is largely a result of the price weakness seen over Q4,” said Warren Patterson, Head of Commodities Strategy at ING.
Most of the rise in hedge funds’ net longs in both WTI and Brent last week was the result of fresh longs, rather than short covering, Patterson noted.
Amid signs that U.S. oil production growth is stalling and that OPEC is tightening the market and may not move in response to U.S. President Donald Trump’s latest Twitter address to the cartel “to increase the flow of oil,” oil prices rose on Monday to their highest levels in nearly five months.
WTI Crude closed at US$61.74 on Monday, the highest since early November, while Brent Crude closed at US$69.12, the highest since mid-November.
This price level is very close to the price that Saudi Arabia is reportedly targeting to put under the Brent oil price, but is several dollars higher than what President Trump is generally comfortable with.
“We continue to hold the view that OPEC+ will largely ignore these calls from the US President, and will remain committed to returning the market to balance. The Saudis have over- complied with the deal, and it would have all been in vain if they were to throw in the towel now,” ING’s Patterson said at the end of last week.
“Furthermore, the Saudis are unlikely to forget last year, where they increased output in the lead up to US sanctions on Iran, only for the US to provide waivers to a number of buyers of Iranian oil,” Patterson added. Related: Expect Higher Oil Prices As OPEC Clashes With Trump
Saudi Arabia is currently signaling that it is and will be doing whatever it takes to rebalance the market and OPEC’s production continues to drop as the Kingdom is over-delivering with its share of the cuts.
Combined with stalled U.S. growth, OPEC’s cuts provide support to oil prices and make speculators and money managers more bullish on oil futures and options.
On the demand side, Chinese factory activity unexpectedly rose last month, at the fastest clip in eight months, providing another support to oil prices with signs that oil demand growth could hold resilient going forward.
“Overall, with a more relaxed financing environment, government efforts to bail out the private sector and positive progress in Sino-U.S. trade talks, the situation across the manufacturing sector recovered in March. The employment situation improved greatly,” Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said, commenting on the Caixin China General Manufacturing PMI survey by Caixin Insight Group and IHS Markit.
Over the past two weeks, hedge fund managers have had reasons to be more bullish on oil and boost their long positions.
By Tsvetana Paraskova for Oilprice.com
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With such a cocktail, oil prices are headed in one direction: upwards to $80 or even higher.
No wonder then that over the past two weeks, hedge fund managers have had reasons to be more bullish on oil and boost their long positions.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London