Hedge funds stay the course to bet on oil rally

New York

HEDGE funds keep betting on an oil rally, even with prices stuck in neutral. Investors pushed bullish wagers on West Texas Intermediate (WTI) crude prices to their highest in a month and cut short-selling bets to the lowest since October, apparently convinced that dwindling global supplies will be more than enough to withstand a weaker economy.

Futures in New York ended the week up by a mere 0.5 per cent, with disappointing reports on US jobs, Chinese exports and global economic growth clouding the outlook for energy demand. But money managers appear to be focusing on the impact of Organization of the Petroleum Exporting Countries (Opec) output cuts, a pipeline explosion in Nigeria and US sanctions on Iran and Venezuela.

"There probably is some expectation that something is going to force production to go lower somewhere," said Leo Mariani, a Keybanc Capital Markets Inc analyst. That has "fired up a little optimism in crude - but I think we need to see some more follow-through".

Net-long WTI positions - the difference between bullish and bearish bets - climbed by 15 per cent to 151,560 options and futures contracts for the week ended March 5, according to US Commodity Futures Trading Commission data released last Friday. It was the first time since late December that investors had access to up-to-date positioning data. The figures had been unavailable during the US government shutdown and then delayed for weeks after it ended. Long-only bets on an increase grew by 5 per cent, the most since July. Wagers on a decline were cut by 13 per cent.

The picture for Brent crude, the global benchmark, was more muddled, with money managers edging back on both bullish and bearish positions. Long-only wagers fell by 1.5 per cent while short-selling bets were cut by 3.2 per cent, the ICE Futures Europe exchange said.

Oil prices surged about 25 per cent till mid-February, but they have largely moved sideways since then. The markets may not find a direction until April, as it becomes clear whether the US plans to revoke waivers allowing Iranian exports to be sold, Mr Mariani said. Opec is also due to meet that month to determine whether to extend its production curbs.

Oil's future is also "highly dependent" on how the ongoing US-China trade war plays out, added Gene McGillian, vice-president of market research at Tradition Energy.

"Until we get a clear indication of how demand growth will play out, we won't see more conviction on things going higher," he said. "We're all watching for the new shoe to drop here." BLOOMBERG