Crude specs caught off guard

The downed jetliner in Ukraine and Israel’s Gaza offensive blindsided speculators who had cut bullish crude bets on the assumption that risks to supply were diminishing.

Crude futures rose after money managers slashed net-long positions in West Texas Intermediate (NYMEX:CLN14), the U.S. benchmark grade, by 15% in the seven days ended July 15, the Commodity Futures Trading Commission said. It was the biggest drop in bullish wagers since March 2013.

“A lot of people were clearly caught off guard by events,” Amrita Sen, chief oil analyst for London-based Energy Aspects Ltd., a researcher, said by phone July 18.

Prices dropped below $100 on July 15 for the first time in two months as the conflict in Iraq spared the country’s main oil-producing region and rebels in Libya said they would reopen export terminals. Hedge funds had increased bets on rising prices to a record, while WTI climbed to a nine-month high in June after militants from a breakaway al-Qaeda group known as Islamic State captured the city of Mosul.

Crude declined 3.3% to $99.96 a barrel on the New York Mercantile Exchange in the period covered by the CFTC. WTI rebounded to $103.13 by July 18 and added 0.3% to $103.41 in today’s electronic trading.

‘Too Optimistic’

“The speculators built length to a record last month, but there was no real loss of oil so they started to exit,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone on July 18. “The events of the last several days show they might have been too optimistic.”

The Malaysian Airlines jet went down over eastern Ukraine, killing all 298 people aboard, July 17, just a day after the U.S. and the European Union imposed new sanctions on Russia, the world’s biggest energy exporter, over its support of separatists in eastern Ukraine. OAO Rosneft, Russia’s largest oil company, and natural gas producer OAO Novatek were among those covered by the penalties.

Israel began a ground operation in Gaza on July 17, also bolstering crude prices. Prime Minister Benjamin Netanyahu said July 18 that the objective of the ground incursion was to go after “terror tunnels” and restore peace. The Middle East accounted for 32% of global crude output last year, BP Plc data show.

Falling Supplies

Futures climbed 1.2% on July 16 after the Energy Information Administration said U.S. crude supplies dropped 7.53 million barrels to 375 million in the week ended July 11. Stockpiles at Cushing, Oklahoma, the delivery point for WTI traded in New York, fell by 650,000 barrels to 20.3 million, the least since November 2008. Refineries operated at 93.8% of capacity, the highest level since August 2005.

“We have strong refinery runs and a downtrend in supplies both nationwide and at Cushing, giving the market support, but if we look ahead, that’s going to shift,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone July 18. “We’re probably at our seasonal peak for refinery runs and as they go into maintenance, crude supplies are going to rebound.”

Refinery operating rates usually increase in late spring and have peaked in July during the past five years, EIA data show. Refiners schedule maintenance for September and October as they transition to winter from summer fuels.

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