Reports of oil rally's death premature as inventories decline

NEW YORK (Bloomberg) -- Hedge funds betting that oil’s rally was over missed an 11% gain after U.S. crude inventories unexpectedly fell.

 

Short positions in West Texas Intermediate crude jumped 35% in the week ended April 5, according to the U.S. Commodity Futures Trading Commission. The next day, the government reported a 4.94 MMbbl drop in U.S. oil inventories, the first decline in eight weeks.

 

"Everybody thought there was going to be a build in the inventories" and the actual data proved otherwise, said Carl Larry, director of oil and gas issues in Houston for consultant Frost & Sullivan, Inc. "The market’s bouncing back a little."

 

WTI oil for May delivery dropped 6.2% to $35.89/bbl on the New York Mercantile Exchange during the report week, before rebounding to $39.72 April 8.

 

Expected Increase

 

The drop in supplies ran counter to analysts’ forecasts for an increase. Production declined to the lowest level since November 2014 while refiners used the most crude in three months, Energy Information Administration data show.

 

U.S. output is sliding after $100 billion in spending cuts last year by explorers amid the worst price meltdown in a generation. The number of active oil rigs in the U.S. declined to the lowest level since 2009, Baker Hughes Inc. data show.

 

Most members of the Organization of Petroleum Exporting Countries and other major producers including Russia plan to meet April 17 in Doha, Qatar, to consider an oil-production freeze amid a global glut.

 

Saudi Arabia, the world’s largest crude exporter, has said it will not cap production unless other producers do the same. Iranian officials, who haven’t committed to attend the Doha gathering, have said their nation plans to expand exports following the removal of international sanctions in January. The meeting can produce an agreement even without Iran’s participation, Nawal al-Fezaia, Kuwait’s OPEC governor, has said.

 

"It looks like investors are betting nothing will come out of the meeting," Dan Flynn, a trader at Price Futures Group in Chicago, said in a phone interview. "I wouldn’t be so sure about that."

 

Bearish Bets

 

Wagers that prices will fall rose by 26,521 contracts of futures and options to 102,119 in the week ended April 5. It was the largest percentage increase since July and pulled the net-long position down 12 percent, CFTC data show.

 

Net bearish positions on diesel fuel increased 27% as futures declined 7% to $1.0746 a gallon. The net-long position in gasoline declined 32%, to 21,665 contracts, the biggest drop since January. Prices on Nymex dropped 5.2% to $1.3778 a gallon.

 

Latin American countries meeting in Quito Friday called for producers to take necessary steps at the Doha meeting to stabilize the market. Waiting for the market to balance itself would be “catastrophic,” Ecuador Oil Minister Carlos Pareja said before the meeting.