Oil Bulls Run Scared in Global Volatility as U.S. Rivals Saudis

Oil enthusiasts are retreating as volatility takes hold of global markets and American gushers rival Saudi Arabia’s.

Hedge funds scaled back bets on rising West Texas Intermediate crude prices by the most since August as shock waves rattled everything from stocks to commodities. The rout intensified fears that demand for crude won’t suffice to drain surging supplies, triggering oil’s worst week since 2016. Futures lost more than $6 and closed below $60 a barrel for the first time this year.

“This week has shaken the confidence a little bit that demand is going to rebound in the same robust fashion that we’ve seen it in the last few months,” Mark Watkins, who helps oversee $142 billion in assets at Park City, Utah-based U.S. Bank Wealth Management, said Friday. “You get this current volatility and some of those long positions may start to close out.”

American weekly crude production topped 10 million barrels a day for the first time on record, and the government forecasts it will skyrocket to 11 million later this year. That means the U.S. is now a top producer of the same caliber as Saudi Arabia and Russia.

A Baker Hughes drilling report on Friday just added to the gloomy picture: The number of oil rigs searching for crude in U.S. fields burst higher by 26 last week, the most in a year.

“A lot of the downturn in the oil price has to do with market expectations of where U.S. supply is going,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London.

The U.S. oil bounty casts doubts over the effectiveness of efforts led by the Organization of Petroleum Exporting Countries to bring the crude market back to balance by curtailing production. It also raises the question of how long OPEC will just watch shale producers win market share and do nothing, with tanker-tracker data already showing its members are increasing shipments.

“People have been deciding in recent days, especially with the supply projections in the U.S., that maybe the bull market has run its course for the time being,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

Hedge funds reduced their WTI net-long position — the difference between bets on a price increase and wagers on a drop — by 4.7 percent to 472,792 futures and options during the week ended Feb. 6, according to the U.S. Commodity Futures Trading Commission. Longs declined by 4.1 percent. Shorts rose for a fourth week. Total positioning shrank the most in three months.

The Brent net-long position dropped 0.6 percent to 574,989 contracts, according to ICE Futures Europe. Longs dipped 0.9 percent to the lowest level in seven weeks, while shorts fell 5.1 percent.

But money managers haven’t completely thrown in the towel on rising prices yet. Brent short positions are still at the lowest since June 2016 and WTI longs are still near record highs. Jeffrey Currie, the global head of commodities research at Goldman Sachs Group Inc., said in Bloomberg TV and radio interviews that despite the sell-off in equities and oil markets, fundamentals “are very much intact.”

With WTI at these levels, “a number of people are going to come in and see it as a buying opportunity,” Tchilinguirian said.

OTHER POSITIONS:

The net-short position of swap dealers, an indication of hedging, decreased from a record, according to the CFTC. In the fuel market, money managers increased their net-long position on benchmark U.S. gasoline by 0.3 percent to a record, while the net-bullish position on diesel dropped 16 percent.