Hedge Funds Defy Emerging Market Rout as Bullish Crude Bets Grow

Investors are more certain that oil prices will increase — but the market isn’t playing along.

Hedge fund bets on rising Brent oil prices jumped to the highest in two months earlier this week, according to data released Friday. The optimism proved mistimed, with crude tumbling the following days as fears of emerging-market crises and trade wars led to a widespread rout of currencies, equities, bonds and commodities.

The disconnect was the latest muddled sign for the oil markets. While money managers concentrated on shrinking supplies from Iran, shaky developing economies and escalating U.S.-China trade tensions are clouding the outlook for global demand. A substantial increase in American fuel stockpiles didn’t help either, and more buildups could further stoke the bad mood, said Michael Lynch of Strategic Energy & Economic Research.

“It’s really going to depend on the next couple of weeks of inventory reports,” Lynch said by telephone from his Winchester, Massachusetts, office. “If the U.S. were to keep putting up the kind of numbers we saw this week, people are going to start to get a little more nervous.”

Net-long positions on Brent crude — the difference between bets on a price increase and wagers on a decline — rose 7 percent in the week ending Sept. 4 to 416,742 futures and options, according to data from ICE Futures Europe. Long-only bets on the international benchmark also climbed.

Net-long wagers on the U.S. crude benchmark, West Texas Intermediate, increased 3.9 percent for the same period to reach a one-month high, the U.S. Commodity Futures Trading Commission said on Friday. Meanwhile, futures in New York posted their biggest weekly decline since July, as the rout in Turkey and other markets raised concerns.

“This whole emerging market situation is sapping a lot of energy from commodity markets,” Bart Melek, head of global commodity strategy at TD Securities in Toronto, said by phone. “Risk appetites have waned somewhat. That’s not particularly good.”

U.S. government data on Thursday showed crude inventories in the nation’s largest distribution hub in Cushing, Oklahoma, rose for a fourth week, with total stockpiles of gasoline and distillates also expanding.

Hedge funds’ continued faith in higher U.S. prices was notable coming at the end of the summer driving season, when demand starts to tail off, said Chris Kettenmann, chief energy strategist at Macro Risk Advisors LLC in New York.

Kettenmann sees reason to believe WTI can rebound, given that it’s trading at about a $9 discount to Brent. That should encourage exports providing a “relief valve” even if inventories keep rising.

“Still a bit surprised by the degree of the selloff,” said Tamar Essner, an analyst at Nasdaq Inc. in New York. “We now have a tug of war between two stories — the increasing enforcement of sanctions on Iran countered by looming risks to demand growth.”

OTHER POSITIONS:

Long-only WTI positions rose by 4.7 percent in the week ending Sept. 4, while shorts surged 19 percent. Money managers increased net-bullish bets on U.S. diesel by 6 percent, the CFTC said. They cut the net wagers on a gasoline rally by 4.3 percent.