Hedge funds capitulate on crude, COT data indicates

Hedge funds cut bullish holdings in crude as record U.S. output added to a global supply glut, spurring the longest losing streak in prices in six years.

Money managers reduced net-long positions in West Texas Intermediate by 2.3% in the week ended Oct. 28, U.S. Commodity Futures Trading Commission data show. Long positions retreated to the lowest level in 17 months.

WTI (NYMEX:CLZ14) fell 12% in October for a fourth consecutive drop, echoing the collapse in prices during the global financial crisis. Production by OPEC rose to the highest in more than a year last month, a Bloomberg survey showed, and U.S. output is running at the fastest pace since at least 1983. The gains came as the International Energy Agency reduced its estimate for demand growth this year and in 2015.

“In 2008 it was a collapse of demand that was largely responsible for the drop in prices,” Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management which oversees about $120 billion, said by phone on Oct. 31. “Now we’re awash in supply.”

WTI fell 1.7% to $81.42 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. Futures were down 1% at $79.76 at 9:49 a.m. today.

October Gains

The Organization of Petroleum Exporting Countries pumped 30.974 million barrels a day in October, the most since August 2013, led by gains in Iraq, Saudi Arabia and Libya, a Bloomberg survey of oil companies, producers and analysts showed. OPEC, which supplies about 40% of the world’s oil, is scheduled to meet Nov. 27 in Vienna to discuss output targets.

“Investors are selling because OPEC is producing too much oil,” John Kilduff, a partner at Again Capital LLC, a New York- based hedge fund that focuses on energy, said by phone Oct. 31. “The focus in November will be on the OPEC meeting and whether they can come to an agreement to make cuts.”

The group’s biggest producers, Saudi Arabia, Iraq, Iran and Kuwait, cut their official selling prices last month, a sign that their primary aim is to preserve market share.

“Within OPEC, there is a price war because the market’s fundamentals have changed,” Iraqi Oil Minister Adel Abdul Mahdi told parliament Oct. 30, according to state TV.

Production Record

U.S. crude output rose 0.4% to 8.97 million barrels a day in the seven days ended Oct. 24, the highest in weekly Energy Information Administration data that began in January 1983.

The Paris-based IEA reduced its estimate of consumption gains this year for the fourth month in a row.

“The bearish supply news and economic weakness in Europe and Japan has largely been factored in,” Haworth said. “Now we’re going to see policy moves by governments and OPEC that could be bullish for the market.”

Net-longs for WTI declined by 4,288 to 182,486 futures and options combined during the week ended Oct. 28. Long positions dropped to 249,841, the least since May 2013, while short positions slipped 2.5% to 67,355.

In other markets, bullish bets on gasoline (NYMEX:RBZ14) increased 0.3% to 31,086 futures and options, the highest level since August. Futures advanced 1.5% to $2.2134 a gallon on Nymex in the reporting period.

Pump Price

Regular gasoline at the pump, averaged nationwide, slid to $2.98 a gallon yesterday, the lowest since Dec. 13, 2010, according to Heathrow, Florida-based AAA, the largest U.S. motoring group.

Bearish wagers on U.S. ultra low sulfur diesel increased 13% to 35,704 contracts. The fuel fell 0.8% to $2.4931 a gallon in the report week.

Net-long wagers on U.S. natural gas (NYMEX:NGZ14) dropped 41% to 19,686 contracts, the lowest since March 2012. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract.

Nymex natural gas fell 10.5 cents to $3.711 per million British thermal units during the report week.

OPEC Quotas

OPEC last cut quotas in December 2008, trimming its target by 2.46 million barrels a day in response to the global recession that sent WTI tumbling from a record $147.27 a barrel in July 2008 to a low of $32.40 in December of the same year.

“The market has a chance to turn here, provided OPEC does something about cutting quotas and actual production levels,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone on Oct 17. “We’ll soon learn how much recent statements have been posturing. Historically, the weaker the price the more OPEC tends to act together as a group.”

About the Author