Crude tumbles to 12-year low as hedge funds head for exit

NEW YORK (Bloomberg) -- Crude declined to a 12-year low, confirming the view of hedge funds that cut bullish price bets to the lowest since 2010.

 

Futures dropped as much as 4.7% in New York, adding to last week’s 10% decrease. Speculators’ net-long position in West Texas Intermediate declined 24% in the week to Jan. 5, U.S. Commodity Futures Trading Commission data show. Producer prices in China fell for a record 46th month, bolstering concern about the world’s second-biggest economy. A rapid appreciation of the U.S. dollar may send Brent oil to as low as $20/bbl, Morgan Stanley said.

 

"We want to see a sign that China has hit bottom and haven’t gotten it yet," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "I’m not convinced that Brent is likely to go to $20 because of the stronger dollar but it’s certainly a realistic possibility."

 

Oil slumped last week as volatility in Chinese markets fueled a rout in global equities and U.S. stockpiles remained more than 120 MMbbl above the five-year average. Saudi Arabian Oil Co., the world’s biggest crude exporter, confirmed on Friday it was studying options for a share sale, including listing “a bundle” of refining subsidiaries.

 

WTI for February delivery fell $1.48, or 4.5%, to $31.68/bbl at 11:25 a.m. on the New York Mercantile Exchange. The contract touched $31.61, the lowest intraday price since December 2003. Total volume traded was 21% above the 100-day average. Prices lost 30% last year.

 

Bullish Bets

 

Brent for February settlement decreased $1.72, or 5.2%, to $31.83/bbl on the London-based ICE Futures Europe exchange. It touched $31.92, the least since April 2004. The European benchmark crude traded at a 15 cent premium to WTI.

 

Speculators’ net-long positions in WTI declined by 23,863 contracts to 76,934 futures and options, the lowest since July 2010, CFTC data show. Longs, or bets that prices will rise, dropped 2.5% to the lowest since July, while shorts climbed 11%.

 

"The hedge funds are saying that this isn’t a good time to try and find a bottom in the oil market," said Bob Yawger, director of the futures division at Mizuho Securities USA in New York

 

Crude also fell as the U.S. dollar climbed, diminishing the appeal of commodities denominated in the currency. The Bloomberg Commodity Index, a gauge of 22 raw materials slumped to the lowest level since 1999.

 

Dollar Impact

 

Oil is particularly leveraged to the dollar and may fall between 10 to 25% if the currency gains 5%, Morgan Stanley analysts including Adam Longson said in a research note dated Monday. Bank of America Corp. cut its average 2016 Brent forecast to $46/bbl from $50.

 

"There are no technicals holding up the price so we’re looking at a falling knife," said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. "Concern about global economic sentiment and dollar strength are continuing to weigh on the market."

 

Saudi Arabian Oil, known as Aramco, is studying whether to list “an appropriate percentage” of shares of the parent or a bundle of “downstream” units, according to an emailed statement Friday. The findings of the review will be presented to the board of directors, which will make recommendations to the state-owned company’s Supreme Council, Aramco said.