Hedge Funds Bullish on Oil | Russell T. Rudy Energy LLC
“World Oil” reports that hedge funds are hoping that the shale boom will go bust. Speculators are betting that falling domestic production and rising demand will reduce the world-wide crude oil oversupply and send prices higher. That inventories are at the highest level since 1929 does not seem to temper their enthusiasm for a bull market.
Mike Wittner, head of oil markets at Societe Generale, observes “The market’s focused not on current oversupply but on predictions of a balance in the second half of the year. Managed money is just adding to the upward momentum.”
Earlier this year, when oil prices hit their lowest level since 2003, operators cut spending. Consequently, in April the oil rig count fell to 332, its lowest level since November 2009; less than a quarter of its 2014 peak.
As investment and drilling fell off, so did production. In April it dropped to 8.94 million barrels of oil per day (MMbopd), the lowest level since October of 2014. The U. S. Energy Information Administration predicts further decreases with the daily average for this year dropping to 8.6 MMbopd.
Francisco Blanch, head of commodities at Bank of America Merrill Lynch, predicts that “Supply in the U. S. is falling pretty quickly, and globally, in the second quarter of this year we are going to have a contraction in global output. That combination of lower supply and robust demand will lead to a change of inventory dynamics in the second half of the year.”
The good news for hedge funds is not confined to domestic production. U. S. consumers have driven demand for gasoline up 5.6% from a year earlier, to 9.4 MMbopd. On the face of it, it would seem that all the pieces are in place for a price rally.
However, Tim Evans with Citi Futures Perspectives cautions that rising OPEC production leaves the oil market vulnerable to a correction. In April the cartel increased production by 484,000 to 33.217 MMbopd, the highest level since 1989. Evans concludes that “More buying now will result in more selling later. At some point rising OPEC production will be recognized as more than offsetting the drop in U. S. production.”
To read the article in its entirety, please go to http://www.worldoil.com/news/2016/5/2/oil-bulls-bet-the-waning-us-shale-boom-will-curb-global-glut .
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