Oil Bulls Flee at Fastest Pace in Three Years as Glut Expands By Bloomberg
Speculators' conviction that oil will rally weakened at the fastest pace in three years, just before futures tumbled into a bear market.
The net-long position in West Texas Intermediate contracted 28 percent in the seven days ended July 21, U.S. Commodity Futures Trading Commission data show. Long positions dropped to a two-year low while short holdings climbed 25 percent.
Oil traded in New York fell more than 20 percent from its June high, meeting the common definition of a bear market. U.S. output has held near a four-decade high while the largest OPEC members pump at record rates, keeping the market oversupplied. The drop was part of a broader retreat in commodity prices to a 13-year low, driven by concern that slower economic growth in China and a stronger dollar will hurt demand.
"Supply is still in excess of what would balance the market," Katherine Spector, a commodities strategist at CIBC World Markets Inc. in New York, said by phone July 24. "We see the global balance improving in the second half of this year and in 2016 but it hasn't happened yet."
WTI dropped $2.68, or 5.1 percent, to $50.36 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. Prices slipped into a bear market two days later and fell to $48.14 on July 24, the lowest close since March 31.
U.S. crude supplies are almost 100 million barrels above the five-year average, according to the Energy Information Administration. Drillers have halted their record retreat from oil fields, increasing the number of active oil rigs by 21 to 659 last week, Baker Hughes data show.
The drop in oil erased more than $100 billion in market value from the 61 companies in the Bloomberg Intelligence North America Independent Explorers and Producers Index.
U.S. producers face plenty of competition. The Organization of Petroleum Exporting Countries pumped the most since August 2012 in June, according to a Bloomberg survey of companies, producers and analysts. Saudi Arabia and Iraq are producing at record levels.
Speculation that Iran will further bolster output is weighing on prices. After its nuclear accord with world powers, Iran will focus on regaining market share it lost because of sanctions, regardless of the impact on prices, Oil Minister Bijan Namdar Zanganeh said July 20.
"The Saudis are pursuing their interests," Sarah Emerson, managing principal of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts, said by phone July 24. "The Saudis see the U.S., Iraq and Iran raising production and aren't going to lose market share."
The net-long position in WTI fell by 40,822 contracts to 106,383 futures and options, the least since December 2012. Longs slipped 5.2 percent while shorts surged to the highest level since March.
In other markets, net bullish bets on Nymex gasoline advanced 35 percent to 17,426. Futures fell 0.5 percent to $1.9209 a gallon. Net bearish wagers on U.S. ultra low sulfur diesel increased 10 percent to 20,711 contracts, the most since April. The fuel slipped 2.7 percent to $1.6784 a gallon.
There's a chance that the downturn in the world's oil industry may be more severe than in 1986, when business endured the deepest slump in 45 years, according to Morgan Stanley.
The global oil market is seen coming into balance in the second half of 2017 at the earliest if OPEC continues pumping crude at present levels and U.S. output remains flat, Deutsche Bank strategist Michael Hsueh said in a report last week. Hsueh said that equilibrium is more likely in 2018.
"There's a lot more room for prices to slide," Emerson said. "It's going to take a long time for this to work itself out."
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