Bullish oil bets boosted too early as price slide continues

[NEW YORK] Speculators increased bullish bets for the first time in seven weeks, a move that came too early in a market that continues to slide.

Money managers' net-long position in crude climbed 13 per cent in the week ended Aug 4, US Commodity Futures Trading Commission data show. That's a rebound from last week's figure, which was the lowest level since 2010.

Major oil companies are preparing for a longer downturn and banks including Societe Generale SA are reducing their price forecasts as crude approaches a six-year low. The plunge has gathered strength as US producers return drilling rigs to service and Iran seeks to increase exports after last month's nuclear agreement with world powers.

"There's a lot of money on the sidelines and when it looks like a bottom is in, there's a temptation to get back in," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone Aug 7. "This is despite the overwhelming evidence that we're oversupplied. Prices can still move a lot lower."

West Texas Intermediate crude dropped US$2.24, or 4.7 per cent, to US$45.74 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. Futures extended the decline to US$43.87 on Aug 7, the lowest since March 17.

Societe Generale reduced its WTI forecasts for the third quarter by a fifth and cut its outlook for 2016 by US$5 a barrel. That follows reductions in the past month by Bank of America Corp. and Citigroup.

A persistent global surplus has made the biggest oil companies more pessimistic about a swift price recovery. Chevron Corp lowered its long-term outlook for crude July 31, joining Royal Dutch Shell Plc and BP Plc in gearing up for an extended period of lower prices.

Producers in the US increased the number of active oil rigs for the fifth time in six weeks, Baker Hughes data showed. The return of rigs may bolster production at a time when US crude inventories are almost 100 million barrels above the five-year average.

Bullish bets are down by more than half since May, just before a price recovery to above US$60 a barrel stalled.

"This looks a lot like earlier in the year when there was a lot excitement to call a bottom and people learned a hard lesson," Mr Kilduff said.

The net-long position in WTI increased by 13,287 contracts to 112,220 futures and options, the biggest gain since April. Longs advanced 4.1 per cent while shorts slipped for the first time in seven weeks.

In other markets, net bullish bets on Nymex gasoline advanced 7.6 per cent to 14,633. Futures fell 6.5 per cent to US$1.6852 a gallon. Net bearish wagers on US ultra low sulfur diesel increased 36 per cent to 27,365 contracts, the most in four months. The fuel slipped 3.5 per cent to US$1.5475 a gallon.

"If we don't hold here there's no telling where the bottom is," Stephen Schork, president of the Schork Group in Villanova, Pennsylvania, said by phone on Aug 7. "It could be in the low US$30s or even lower."

BLOOMBERG