An oil pump jack pumps oil in a field near Calgary, Alta.Todd Korol/Reuters
Oil investors are back in the ring.
Hedge funds are finding betting on West Texas intermediate crude more attractive again, with total positioning on the U.S. benchmark increasing to the highest in almost a year. The surge comes as oil prices have held steady above $50 (U.S.) a barrel – a key psychological level – for about two weeks.
"In general, people are more willing to get into oil right now," Ashley Petersen, lead oil analyst at Stratas Advisors in New York, said in a telephone interview. "Over all, there's been a real belief that the industry has sort of stabilized the boat and is on the upswing."
Many investors left the oil market after prices crashed three years ago. Then, "it was just a little too hot for some. Risk profiles at different funds just didn't really encourage taking on crude when there were other better options out there," Petersen said.
Now, she added, "the overall picture is more stable."
While the number of bets overall is on the rise, investors remain cautious on committing too quickly to an increase in the U.S. benchmark. Hedge funds reduced bets on rising WTI prices for a third week, with short-sellers boosting positions by the most since late August.
The oil rig count has declined for three straight weeks, and the world's two biggest oil field service companies said North America's growth engine is slowing, signalling the market may be on the right path.
Yet, the rebalancing process aimed at deflating stockpiles and boosting prices is taking a lot longer than expected, according to Mark Watkins, a Park City, Utah-based regional investment manager at U.S. Bank Wealth Management.
Seventh inning
"We're in the seventh-inning stretch of a baseball game," Mr. Watkins, who oversees $142-billion in assets, said by telephone. "It's that seventh inning, but we probably have those extra innings that pop up."
WTI futures are trading around $52 a barrel, up 10 per cent since the end of August. Investors will be keeping their eyes on the Baker Hughes rig count to see whether or not the recent oil price rise will spur more drilling activity, according to Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Mass.
Hedge funds reduced their WTI net-long position – the difference between bets on a price increase and wagers on a drop – by 8.2 per cent to 219,077 futures and options in the week ended Oct. 17, the largest reduction since August, data from the Commodity Futures Trading Commission showed. Shorts jumped 18 per cent, while longs increased 0.8 per cent.
Different levers are moving Brent bets. Tensions between Iraqi forces and Kurdish fighters led the net-bullish position to rise, Mr. Lynch said.
The net-long position on Brent crude climbed 1.2 per cent to 494,139 contracts, according to data from ICE Futures Europe. Longs increased by 0.2 per cent, while shorts dipped 7.2 per cent to the lowest level in 10 weeks. Producer shorts on Brent, a measure of hedging activity, rose to a record.
In the fuel market, money managers boosted their net-long position on benchmark U.S. gasoline by 2.6 per cent. Meanwhile, the net-bullish position on diesel increased 4.1 per cent.
Over the long run, Mr. Watkins expressed optimism about where the market may be headed.
"We are seeing synchronized global economic strength that continues to surface and it's really going to start to increase the demand for oil," he said.