The fall from grace last week for oil may only get worse from here.
In a move that came just prior to a market dive that sent prices below $50 a barrel for the first time since December, according to U.S. Commodity Futures Trading Commission data, investors cut bullish wagers on West Texas Intermediate crude to a one month-low.
“This report is just the beginning,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The volume and breadth of the decline this week show that there was massive liquidation. Next week’s report will be the blockbuster.”
U.S. drilling rigs are returning at the fastest rate since 2012 and continuing to climb is the optimism about an agreement between the Organization of Petroleum Exporting Countries and some non-OPEC producers to cut output is fizzling as stockpiles. The S&P 500 as helped dragged to its first weekly decline since January by the fall in oil prices, which had traded between $50.50 and $55.24 since Dec. 16.
After a government report showed U.S. inventories reached a record, the market’s volatility surged the most since before the 2014 price crash started. This resulted in the wiping out of the gains since OPEC agreed to cut output at the end of November. And after Baker Hughes Inc. data showed American shale explorers keep adding rigs, the rout accelerated.
According to the CFTC, following a 6.5 percent drop the previous week, in the week ended March 7, hedge funds Bottom of Form
trimmed their WTI net-long position, or the difference between bets on a price increase and wagers on a decline, by 2.9 percent.
“The data from the last two reports suggests they were getting nervous,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said. “Money managers were becoming concerned about their net exposure and the lack of upward movement in price.”
If companies keep increasing spending to boost drilling, his industry could “kill” the oil market, Shale billionaire Harold Hamm said. Inventories haven’t fallen as fast as OPEC had expected, said Saudi Arabia Oil Minister Khalid Al-Falih.
“There’s been a loss of confidence,” Evans said. “The fourth consecutive U.S. crude inventory record might have helped send them for the exits and the admission of Khalid Al-Falih that inventories weren’t falling as much as anticipated also caught their attention.”
According to an Energy Information Administration report on March 8, noting the highest in weekly data going back to 1982, U.S. crude stockpiles rose to 528.4 million barrels in the week ended March 3. Noting the highest since February 2016, crude production rose to 9.09 million barrels a day. According to Baker Hughes Inc, the nation’s active oil-rig count has almost double since May to 617 last week.
And protection against a price reversal is increasingly being sought by producers as output climbs.
“We’re going to be watching the rig counts pretty closely from now on,” Mark Watkins, the Park City, Utah-based regional investment manager for the Private Client Group at U.S. Bank, which oversees $136 billion in assets, said by telephone. “If prices stay under $50 we should see some North American producers slow investment.”
(Adapted from Bloomberg)