Oil gloom turns to boom as the market's worst fears fade away

[NEW YORK] Investors are the most optimistic on oil in two months as the worst fears that roiled markets at the end of last year start to dissipate.

Hedge funds boosted their net wagers on rising Brent crude prices by 9 per cent in the week ended Jan 15, mostly because they continued to unwind a short-selling spree from the end of 2018, data from the ICE Futures Europe exchange show.

The shift in sentiment culminated with the global benchmark closing at its highest in eight weeks on Friday after China was said to propose a ramp-up in imports from the US to end a trade war between the world's two largest economies. Signs from the US Federal Reserve that it won't rush to raise interest rates have also spurred investors to reverse bets that oil would fall while the dollar would rise.

"Everyone thought it was doom and gloom four or five weeks ago, with a massive economic slowdown coming, and I think that outlook has just shifted," KeyBanc Capital Markets analyst Leo Mariani said in an interview from Austin, Texas. "There's definitely been a lot of re-positioning as a result."

Fading concerns over trade and monetary policy are helping the market focus on positive developments in the oil market: OPEC seems to mean business in draining a global supply glut and the International Energy Agency expects demand to improve this year.

Brent net-long positions -- the difference between bullish and bearish wagers -- reached 172,905 options and futures contracts in the week ending Jan 15, ICE Futures Europe said on Friday. That was the most bullish since Nov 20. Longs rose 1.8 per cent, while shorts fell 10 per cent.

In the US, oil hasn't started off this strong in 18 years. After closing out 2018 in free-fall, US crude prices have rebounded more than 18 per cent to start this year. That's the biggest climb over the first 13 trading days since January 2001, according to New York Mercantile Exchange data compiled by Bloomberg.

"Now that we're three weeks into January and the production cuts are starting to bite, it's a strong signal for shorts to cover," said Chris Kettenmann, chief energy strategist at Macro Risk Advisors LLC. "For now, it's really OPEC's game in terms of how aggressive they are in removing those barrels."

While the outlook has brightened, hedge funds will need more certainty on a trade deal or sustained growth to start significantly raising their long bets.

"Until we get a green light from either economy on trade, I think it's going to be tough for longs to grow at an accelerated rate," Mr Kettenmann said.

BLOOMBERG