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Oil CEOs' grim outlook rubs off on speculators fleeing market

Monday, August 3, 2015 - 17:12

[HOUSTON] The world's biggest oil companies are painting a grim picture of the future and speculators are listening.

Hedge funds reduced bullish bets to the lowest level in five years as oil capped the worst month since the financial crisis. The net-long position in West Texas Intermediate contracted 7 per cent in the seven days ended July 28, US Commodity Futures Trading Commission data show.

BP Plc said oil prices will be lower for longer and Royal Dutch Shell Plc said it's preparing for a prolonged downturn. Exxon Mobil Corp and Chevron Corp reported their worst earnings in years. Supply will outpace demand by 1 million barrels a day through 2016, according to Bank of America Corp. Prices need to stay below US$40 a barrel for months for US output to fall enough to erode the global surplus, IHS Inc said.

"The speculators are looking at the bad earnings and the oil executives' negative tone of commentary, and taking it as a bearish sign," Phil Flynn, senior market analyst for Price Futures Group Inc in Chicago, said by phone July 31. "Everybody is running out of this market in droves."

WTI dropped $2.38, or 4.7 per cent, to US$47.98 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. Futures slid 75 cents to US$46.37 a barrel in electronic trading at 9:27 am in London, after capping a 21 per cent drop in July, the biggest monthly decline in almost seven years.

Exxon, the biggest US energy producer, reported July 31 its lowest profit since 2009 while No 2 Chevron posted its worst results in 12 years. Chevron earlier last week said it would eliminate 1,500 jobs in an effort to cut us$1 billion in spending.

BP, Shell, Schlumberger Ltd and Halliburton Co have announced thousands of job cuts in recent weeks as they prepare for a prolonged stretch of low prices. Since the crude rout began last summer, the industry has eliminated 150,000 jobs, according to Graves & Co, a Houston-based adviser that has closely tracked the cutbacks.

"We're hearing less talk about prices being unsustainably low and somewhat more talk about prices being lower for longer," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone July 31. "That's a more realistic expectation."

US crude supplies are 95 million barrels above the five- year average, according to the Energy Information Administration. Inventories in Cushing, Oklahoma, the delivery point for US futures, are at a record high for the end of July.

Drillers have halted their record retreat from oil fields, increasing the number of active oil rigs by five to 664 last week, Baker Hughes data show. Even with less than half as many rigs in the field as last year, oil production has climbed as companies have focused on richer fields and more efficient drilling methods.

"Costs are lower this year by about 20 per cent, so that a break- even cost of US$60 in 2014 is now in the upper US$40s per barrel for WTI," James Burkhard, a vice president at Englewood, Colorado- based energy consultant IHS, said in a report July 31.

The net-long position for managed money in WTI fell by 7,450 contracts to 98,933 futures and options, the smallest since September 2010. Long positions rose 3 per cent while short holdings jumped 11 per cent to the highest level since March.

In other markets, net bullish bets on Nymex gasoline contracted 22 per cent to 13,604. Futures fell 6.1 per cent to US$1.8032 a gallon. Net-short wagers on US ultra low sulfur diesel decreased 3.1 per cent to 20,068 contracts. The fuel slipped 4.4 per cent to $1.6044 a gallon.

Output from the Organization of Petroleum Exporting Countries in July was up 6.5 per cent from a year ago. Oil exports from southern Iraq rose to a record 3.064 million barrels a day in July, Thaer Yassin, spokesman of the state- owned South Oil Co, said last week.

"If we're living in a world where US production is up 9 per cent and Opec is 6 per cent higher, and global demand is growing by 1.4 per cent, you can understand that there's an imbalance there," said Mr Evans of Citi Futures Perspective.

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