Hedge funds on the run from crude?

March 5, 2015 08:31 AM


Maybe Cushing, Okla., won't get filled up so fast after all. Hedge funds that had a record short position coming into this week must be a little bit worried that crude oil prices could not stay lower after the Energy Information Administration reported a mind boggling 10.3 million barrel build in crude oil supply.

Despite that stunning number in the all-important Cushing delivery point, supply increased by a much less than expected 536,000 barrels. With ultra bears basing their predictions on the fact that Cushing would soon be overflowing, this number puts a monkey wrench into their time table. The longer it takes for Cushing to fill the better chance for demand to improve and avoid the tanks from overflowing. That also means that Hedge funds may have to cover as oil seems to be moving out of Cushing and down to the Gulf Coast where supply hit a record high.

Ultra bears were also harping on the fact that oil production continued to rise as the U.S. produced 9.32 million barrels a day, the highest level since 1985, which was expected. There is absolutely no one that I know of that has ever suggested that the cut in rig counts and capital spending cuts would slow the production growth in the short term. What is expected though is that growth will level off in a few months and then start its inevitable decline later in the year and into next year. That should come at a time when demand is expected to increase as the market gets a global demand boost by global central banks. Even back in 2013 when Cushing supplies were higher that they are now somehow Cushing did not overflow. The increase in supply also will improve the case to drop the ban on U.S. oil exports. Much of that record supply in the Gulf Coast, when he time is right, may start to find its way out into the global marketplace.

The other reason that we saw such a big build in oil supply was down to weather. East Coast refinery output plunged as frozen rivers and refinery girts hampered production. Distillate fuel inventories decreased by 1.7 million barrels last week and are still well below the average range of supply for this time of year. Gas supply came in better than expected, at 46,000 barrels, as demand may have been impacted by snow and cold. Over all refineries operated at 86.6% of their capacity, down from 87.4% the prior week. The national average price of gasoline is $2.44 a gallon. That's $1.02 cheaper than last year at this time, but up 37 cents over the past month. 

Demand prospects are improving. Saudi Arabia has said that prices have stabilized and had the confidence to raise prices. The European Central bank is expected to reveal details of a large-scale quantitative easing asset purchase program. If he does not disappoint that should give oil a boost. QE has always been bullish for oil. 

Check out Phil Flynn's interview with Dan Collins, Editor & Chief of Futures magazine, about hedge funds in crude, oil lows and how Futures has all the news for today's modern trader.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.