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Business News/ Market / Stock-market-news/  Oil pessimists exit market as supplies seen closer to balance
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Oil pessimists exit market as supplies seen closer to balance

Speculators reduced bets on falling prices to the lowest level in 11 months as oil briefly breached $50 a barrel on signs supplies are coming into balance

An oil pump operates in the Awali oil field in Bahrain. Photo: Phil Weymouth/BloombergPremium
An oil pump operates in the Awali oil field in Bahrain. Photo: Phil Weymouth/Bloomberg

New York: The oil market doomsayers are beginning to capitulate.

Speculators reduced bets on falling prices to the lowest level in 11 months as oil briefly breached $50 a barrel on signs supplies are coming into balance.

Crude climbed 7.4% this month in New York amid lower US production and unplanned disruptions in Canada and Nigeria. Prices are up almost 90% since February. Money managers’ short position in US benchmark crude reached the least since June, according to data from the Commodity Futures Trading Commission (CFTC).

“If you’ve been short since February this has been a very painful ride," said Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management in Houston. “There are always a few die-hards but otherwise you’d want to get out. This is indicative of the improving fundamentals."

West Texas Intermediate futures rose 0.6% on the New York Mercantile Exchange during the CFTC report week, and closed at $49.33 on Friday.

Oil has surged amid a spate of disruptions. Nigerian crude output has dropped to the lowest level in 27 years as militants increased attacks on pipelines in the Niger River delta. Fires that began early May in Fort McMurray shut about 1.2 million barrels a day of production in Canada’s oil-sands region.

Market balance

Analysts from the International Energy Agency to Goldman Sachs Group Inc. say the crude glut is dissipating as supply and demand move back into balance. Goldman increased its 2016 forecast for WTI to $44.60 a barrel, from $38.40 in a report dated 15 May.

“The confidence of the shorts has been shattered," said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “A lot of bears continued to bet that prices would fall well into the rally. When relatively bearish banks like Goldman Sachs changed to a more bullish outlook, bears noticed."

US crude output fell to 8.77 million barrels a day in the week ended 20 May, the least since September 2014, an Energy Information Administration report showed. The number of active oil rigs in the US slipped by 2 to 316 last week, the lowest number since October 2009, according to data from Baker Hughes Inc.

Rig count

“The rigs number underlines the bullish case," Flynn said. “They are still cutting the rig count and it’s going to take months before any price increase can result in increased oil production."

The short position in WTI fell by 3,047 futures and options combined to 60,932, CFTC data show. Longs slipped 2.6%, while net-long positions dropped 2.1%.

In other markets, net bullish wagers on US ultra low sulfur diesel more than doubled to 13,378 contracts, the highest since July 2014, as futures climbed 1.5%. Net bullish bets on Nymex gasoline slipped 10% to 21,263 contracts. Gasoline futures increased 1.2% in the period.

“The products are more interesting than crude this week," said Tim Evans, an energy analyst at Citi Futures Perspective in New York. In the diesel market “money managers are more optimistic than they’ve been in almost two years, which is pretty impressive."

The Organization of Petroleum Exporting Countries (Opec) is unlikely to reach any agreement to limit output when it meets 2 June in Vienna, as the group sticks with Saudi Arabia’s strategy of squeezing out rivals, according all but one of 27 analysts surveyed by Bloomberg.

“There wasn’t much of a move either way; the drop in both shorts and longs was small," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “The market didn’t do much after hitting $50. They seem to be betting that the Opec meeting will end with a whimper not a bang." Bloomberg

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Published: 30 May 2016, 02:39 PM IST
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