Crude looks unstoppable as hedge funds take bets to new high



The enthusiasm in the oil markets is breaking records.

Hedge funds reported record wagers on continued price increases for both U.S. and global oil benchmarks, along with gasoline and diesel. Meanwhile, producers are hedging production at record rates as oil experiences its best January since 2006.

“There is a lot of interest in the direction of crude oil,” Rob Thummel, managing director at Tortoise Capital Advisors LLC, which handles $16 billion in energy-related assets, said by telephone. “The long oil trade continues to be the place to be.”

The tailwinds propelling futures to three-year highs increasingly converge: OPEC has shown unprecedented discipline in sticking to output cuts, Russia and Saudi Arabia are doubling down on their commitment to wipe out the global supply glut, U.S. stockpiles are on their longest downhill slide ever, and last week a boost from a weaker dollar was added to the mix.

Another significant sign the oil crash is behind us, is the clear shift in the futures curve. Both in New York and London, the closer the delivery, the higher the price all the way through 2022. That pattern, known as backwardation, is typical of times when demand is rising and supplies are tightening, and it hadn’t been so marked since 2014.

At the World Economic Forum in Davos last week, Marco Dunand, the head of trading house Mercuria Energy Group Holding, said the crude market will remain in backwardation throughout this year with prices trading between $60 and $75/bbl. BBL Commodities, one of the world’s largest oil-focused hedge funds, believes Brent crude will climb to $80 in 2018.

Also in Davos, chatter emerged from OPEC oil ministers on the favorable state of supply and demand.

OPEC Secretary-General Mohammad Barkindo said he sees the much-anticipated rebalancing of the market occurring this year, Russia’s Energy Minister Alexander Novak said that goal is almost in hand and Saudi Minister of Energy and Industry Khalid al-Falih said there are no signs of a significant slowdown in oil demand growth.

“We continue to attract people that think the rebalance is going to continue,” Gene McGillian, a market research manager at Tradition Energy in Stamford, Connecticut, said by telephone.

A weaker dollar, which has increased the appeal of commodities priced in the currency, has also added to the upward momentum in oil. The Bloomberg Dollar Spot Index has slid 3.5% so far this month.


Source: World Oil

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