Oil is looking unstoppable as hedge funds bet bigger

Bloomberg

The enthusiasm in the oil markets is breaking records. Hedge funds reported record wagers on continued price increases for both US and global oil benchmarks, along with gasoline and diesel. Meanwhile, producers are hedging production at record rates as oil experiences its best January since 2006. “There is a lot of interest in the direction of crude oil,” Rob Thummel, managing director at Tortoise Capital Advisors LLC, which handles $16 billion in energy-related assets, said by telephone. “The long oil trade continues to be the place to be.”
The tailwinds propelling futures to three-year highs increasingly converge: OPEC has shown unprecedented discipline in sticking to output cuts, Russia and Saudi are doubling down on commitment to wipe out global supply glut, US stockpiles are on their longest downhill slide ever, and last week a boost from a weaker dollar was added to the mix. Another significant sign the oil crash is behind us, is the clear shift in futures curve. Both in New York and London, the closer the delivery, the higher the price all the way through 2022. That pattern, known as backwardation, is typical of times when demand is rising and supplies are tightening, and it hadn’t been so marked since 2014.
At the World Economic Forum in Davos last week, Marco Dunand, the head of trading house Mercuria Energy Group Holding SA, said the crude market will remain in backwardation throughout this year with prices trading between $60 and $75 a barrel. BBL Commodities LP, one of the world’s largest oil-focussed hedge funds, believes Brent crude will climb to $80 in 2018. Also in Davos, chatter emerged from OPEC oil ministers on the favourable state of supply and demand.
OPEC Secretary-General Mohammad Barkindo said he sees the much-anticipated rebalancing of the market occurring this year, Russia’s Energy Minister Alexander Novak said that goal is almost in hand and Saudi Minister of Energy and Industry Khalid al-Falih said there are no signs of a significant slowdown in oil demand growth. “We continue to attract people that think the rebalance is going to continue,” Gene McGillian, a market research manager at Tradition Energy in Stamford, Connecticut, said by telephone. A weaker dollar, which has increased the appeal of commodities priced in the currency, has also added to the upward momentum in oil. The Bloomberg Dollar Spot Index has slid 3.5 percent so far this month.
“Selling begets selling and and buying begets buying,” Pavel Molchanov, an energy research analyst at Raymond James in Houston, said by telephone. “There is a momentum trade at work here. Technicals look great and there is positive sentiment.”
Hedge funds raised their West Texas Intermediate net-long position — the difference between bets on a price increase and wagers on a drop — by 2.9 percent to 496,111 futures and options during the week ended Jan. 23, the highest in US Commodity Futures Trading Commission data going back to 2006.

US oil’s spread to Brent narrows to tightest in five months
Bloomberg

US oil strengthened against the global Brent benchmark, reducing the gap to the lowest in five months, amid declining stockpiles. West Texas Intermediate futures in New York were little changed while Brent in London slipped 0.5 percent.
The convergence is emerging amid concern that WTI’s recent jump — spurred by a record 10 weekly declines in American stockpiles — will encourage higher production. Rigs drilling for crude in the US have risen to the most since September.
“It follows the trend with the declining inventories in
Cushing, Oklahoma, which has been strengthening WTI relative to Brent,” says Bjarne Schieldrop, chief commodities analyst
at SEB AB in Oslo.
It could be bearish for Brent “because that widening
spread was an important element for why it rallied over
the summer. You could lift Brent without stimulating shale
too much.”