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[NEW YORK] The oil market just hit a yellow light.
Crude's advance of more than 90 per cent from a 12-year low earlier this year has US shale producers starting to return to their drilling rigs, threatening to slow further gains.
"The US$50-to-US$60 a barrel area is the sweet spot," said Mark Watkins, the Park City, Utah-based regional investment manager for The Private Client Group of US Bank, which oversees US$128 billion of assets.
"You start to have producers come back at US$50, but a lot of them come in at US$60."
Money managers were cautious in the week ended June 7, betting more heavily on a price drop than on further gains, according to data from the Commodity Futures Trading Commission.
WTI rose 2.6 per cent to US$50.36 a barrel on the New York Mercantile Exchange during the report week and fell 49 cents, or 1 per cent, to US$48.58 at 11:37 am Singapore time on Monday.
Prices have climbed enough for Continental Resources Inc to dispatch fracking crews to unfinished wells in the Bakken shale region, chief executive officer Harold Hamm said June 9. Those wells were left uncompleted as tumbling prices forced explorers to halt projects to conserve shrinking cash flows.
Helmerich & Payne Inc, the biggest drilling-rig contractor in the US, and Independence Contract Drilling Inc said last week they were receiving more queries from oil explorers.
"Everyone is questioning the price when US rigs come back," Paul Sankey, an energy analyst at Wolfe Research LLC, said June 10 on Bloomberg Radio. "At US$55-to-US$60 we would return to growth in the US."
The number of active oil rigs in the US increased by three last week after jumping by nine in the prior seven days, the first back-to-back gain since August, Baker Hughes Inc data show. US crude production is still well below last year's peak, and explorers have idled more than 1,000 oil rigs since the start of last year.
Forecasters including the International Energy Agency and Goldman Sachs agree that the crude glut is starting to dwindle as the Organisation of Petroleum Exporting Countries' policy of maintaining output squeezes out higher-cost rivals.
Global disruptions reached an average 3.6 million barrels a day last month, the most since the EIA began tracking outages in 2011. Fires that began early May in Alberta took out an average 800,000 barrels of Canadian supply last month, while Nigerian crude output dropped to the lowest in 27 years as militants increased attacks on pipelines in the Niger River delta.
"In April and May, before the worst of the disruptions, there was already a consensus that the market would be in balance the second half of the year," said Michael Wittner, the New York-based head of oil-market research at Societe Generale SA.
"Nigeria and Canada just accelerated the rebalancing." Hedge funds' short position in WTI rose by 24,324 futures and options combined to 77,701, the biggest per centage gain in 11 months, CFTC data show.
Longs, or bets on rising prices, increased by 17,065, reducing the net-long position by 3 per cent.
In other markets, net bullish wagers on US ultra low sulfur diesel dropped 8.8 per cent to 14,115 contracts as futures climbed 2.9 per cent. Net bullish bets on Nymex gasoline slipped 22 per cent to 12,552 contracts, the lowest since November.
Gasoline futures decreased 1.7 per cent in the period. The rally is setting up the conditions of its own demise, according to Mr Watkins and Mr Sankey. When the rigs return to the shale patch, prices will move lower.
"This is the most hated bull market in history," Mr Sankey said. "Everyone thinks it will end."