Investors start doubting oil rally

New York - The oil market’s failure to break out of the tightest range in more than a decade is sapping investor interest.

After hitting a record high last week, hedge funds reduced wagers that US oil prices would rise as concern grows that the market is again becoming vulnerable to a drop.

Earlier bullish sentiment was based on optimism that Opec production cuts would ease supply gluts. Now record US crude stockpiles are raising doubts about that outlook.

"They’ve gone so far on hopes and dreams," Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by telephone.

"I’m worried they’ve overdone it, since we haven’t seen much happen with measures that would support the market - i.e. inventories."

The Organization of Petroleum Exporting Countries deal with 11 other major producers to reduce output spurred a 17% rally in US oil prices during the last five weeks of 2016.

This year, the rally has stalled as American production and supplies advanced. West Texas Intermediate bounced between $51.22 and $54.94 in February, the tightest range since August 2003.

Hedge funds trimmed their net-long position on WTI, or the difference between bets on a price increase and wagers on a decline, by 6.5% in the week ended February 28, US Commodity Futures Trading Commission data show.

WTI slipped 5 cents to $54.01 a barrel in the report week, and lost 19 cents to $53.14 a barrel at 1:57 in Singapore.

"It’s a relatively small adjustment to the overall positioning in the market," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said in a telephone interview. "With the sizable accumulation of net-length in the market, this raises concerns that it’s about to stall out and rollover."

Opec curbs

Opec crude output fell by 65 000 barrels a day to 32.17 million in February, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data.

The 10 members of the group that pledged to make cuts in Vienna in November implemented 104% of those reductions, largely because Saudi Arabia went beyond its target.

US crude inventories climbed to 520.2 million barrels in the week ended February 24, the highest in weekly data going back to 1982, according to the Energy Information Administration.

Production rose to 9.03 million barrels a day during the same period, the highest since March 2016. The American oil rig count rose to 609 last week, the highest since October 2015, according to Baker Hughes

"The market is very long and very vulnerable," Stephen Schork, president of Schork Group Inc., a consulting company in Villanova, Pennsylvania, said by telephone.

"They are trying to wait out the turnaround season, which will be over in a month, and are betting Opec will continue to pull back barrels."

Seasonal demand

US crude demand typically drops in the first quarter when refiners plan maintenance programs because that’s when there’s a lull between winter preparations and the summer surge of gasoline consumption.

These repairs and upgrades, known as turnarounds, usually wane in March and April.

Hedge funds reduced their net-long position in WTI by 26 930 futures and options to 386 707, the biggest decline since November. Longs slipped 3.9% from an all-time high, while shorts jumped 24%.

WTI tumbled 2.3% on March 2 as the dollar surged against its peers on speculation the Federal Reserve will raise interest rates this month.

Futures also settled below the 50-day moving average for the first time since November 29, the day before Opec agreed to its first supply cut since 2008.

Rob Haworth, a senior investment strategist in Seattle at US Bank Wealth Management, which oversees $133bn of assets, said he’s curious to see how the 2.3% price drop on March 2 will affect the next CFTC report.

Money managers "were rather quiet in the period of this report; they didn’t give up but they didn’t add either. It looks like speculators are finally becoming contemplative about the risks."