Hedge Funds Are Bearish on Energy Futures
October 21, 2019
Baker Hughes reported that in the US 1 crude oil rig came online putting total crude rigs at 713. This was the second consecutive week that the rig count went up, but it is also the lowest total since May of 2017 and last year at this time were 873 crude rigs.
President Donald Trump said he thinks a trade deal between the US and China will be signed by the time the Asia-Pacific Economic Cooperation meetings take place in Chile on November 16th and 17th. The White House announced that China agreed to buy up to $50 billion of US farm products annually as part of the first phase of a trade deal, although China seems slow to follow through.
Helping to add some selling pressure to the market on Friday was the US retail sales number for September. Sales were down 0.3% for the first time in 7 months. Core retail sales (less autos & gas) came in flat for September. This news was a concern for the markets.
Total said oil markets have lost 2 million bpd of crude oil this year due to security and political issues but are more concerned about slowing demand. The political issues that led to the loss of crude supply include US sanctions imposed on Venezuela and Iran and disruptions in Saudi Arabia and Libya.
Chevron said the Trump administration’s plan to let the company’s Venezuela sanctions waiver expire could ultimately drive oil production up and bolster Russia’s standing in the global market. Chevron and four US oil services companies are operating in Venezuela outside of US sanctions under a US Treasury Department general license which expires on October 25th. Chevron stands to lose an estimated $2.5 billion if the waiver expires and it is forced to leave Venezuela. Some Analysts believe that Venezuela’s oil output already at a low of 600,000 bpd could fall below 300,000 bpd, if the waiver is allowed to expire. However, Chevron and other analysts believe that any decline in production will be short-lived if Rosneft of another Russian or Chinese company takes control of Chevron’s Venezuela Assets.
UBS sees Brent crude price increasing towards $63 per barrel by the end of the year before giving back those gains and declining towards $55 per barrel by mid-2020. However, it remains cautious on the outlook for next year given weak oil demand growth and strong non-OPEC supply growth.
From John Kemp of Reuters, about hedge fund positions in energy. Hedge funds stuck with their existing bearish view on oil prices last week – leaving positions in petroleum broadly unchanged after two weeks of heavy selling at the end of September and the start of October. Hedge funds and other money managers sold the equivalent of just 4 million barrels in the six major petroleum futures and options contract in the week to October 15.
The pause came after sales totaling 190 million barres love the two previous weeks, according to record published by the US Commodity Futures Trading Commission and ICE Futures Europe.
Portfolio managers were small sellers last week of NYMEX and ICE WTI (11 million barrels), Brent (3 million barrels), and European gasoline (0.5 million barrels), but small buyers of US gasoline (9 million) and US diesel (1 million).
Hedge funds now hold just 2.5 longs positions for every short position, down from a recent high of almost 9:1 in April and the most bearish position since the middle of January.
Most of the talk about more short positions is coming on the back of the outlook for weak global demand and decreased supply. If the China and US trade deal gets done it will be interesting to see how that changes the markets outlook. The trade deal between the US and China is still a big deal for these markets.