Bets on Oil Rout Seen Peaking as Shale Boom Starts to Falter

Oil short-sellers have been on a roll, but their bets on declining prices may have begun to hit a wall.

Hedge-fund wagers on lower West Texas Intermediate crude reached the highest level since August in the week ended June 27, after more than doubling in two months, according to Commodity Futures Trading Commission data. The bearish bets increased at a much slower pace than in the previous two weeks, though. The U.S. benchmark price had its longest rally of the year, climbing 7 percent last week, amid signs U.S. shale output is stuttering.

“That slowdown was the prelude to what should be probably a pretty sizable net change in the position next week,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by telephone. The sell-off appears to be “running out of steam.”

Crude capped its best week this year on Friday as shale drillers reduced the number of oil rigs for the first time since January, and a government report showed U.S. production might not be growing so fast. Signs of a waning shale boom are helping allay fears that efforts led by the Organization of Petroleum Exporting Countries to ease a global supply glut aren’t working.

WTI futures held steady at $46.03 a barrel on Monday as of 6 a.m. in New York.

U.S. explorers last week hit pause on the longest stretch of uninterrupted growth on records dating back to 1987 — after more than doubling their oil-rig count in a year. Output fell for the first time this year in April and was 190,000 barrels lower than the Energy Information Administration’s preliminary weekly estimates. The agency has also lowered estimates for production in the Permian, America’s most prolific oil field.

Money managers’ WTI net-long position, the difference between wagers on a price increase and bets on a decline, was little changed at 133,606 futures and options, according to the CFTC report released Friday. Long positions rose by 4.2 percent to 314,090 contracts, while short positions climbed by 8.3 percent to 180,484, the CFTC said. Shorts had jumped by more than 30 percent in each of the previous two weeks.


“The real question is: Have all the fears about the OPEC production cuts been basically priced into the market?” said Gene McGillian, manager for market research at Tradition Energy in Stamford, Connecticut.

Much of the price rebound last week might have been driven by short-covering, he said. That’s when short-sellers take advantage of low prices to go on a buying spree and return securities they borrowed and sold when prices were higher.

Wagers from oil producers show explorers are less pessimistic, trimming their net-bearish position for a second week, according to the CFTC. This year they’ve been the most active in the futures and options market since 2007, with the total number of short and long positions peaking in May.

As for fuels, net-bearish bets on gasoline prices fell 3.3 percent, while net-short wagers on diesel rose 22 percent, the CFTC report showed.

We may be seeing “the last breath” of this sell-off as we enter a period of short-covering, Again Capital’s Kilduff said. The market “ran out of more sellers,” he said.

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