Oil's swoon spurs investors to take off their rally caps

An oil pumpjack
An oil pumpjack

Enthusiasm for oil is at its worst in a year as global financial woes and rising US stockpiles dim the demand outlook.

Hedge funds cut bets on rising West Texas Intermediate crude prices for a sixth straight week, to the lowest since October 2017. Total wagers, long or short, were near the lowest in two years. Before a slight rebound on Friday, the US benchmark sank 10% in little more than two weeks.

“There are growing concerns in the market about demand growth stalling and that you could see new barrels come into the market to replace Iranian crude starting in November,” said Gene McGillian, manager of market research at Tradition Energy. “That’s forced some longs to lock in their profits.”

Oil slipped to the lowest in almost a month last week as expanding American stockpiles overshadowed tensions between the US and Saudi Arabia over the disappearance of a prominent kingdom critic. Meanwhile, trade tensions between the Trump administration and China and financials woes in emerging economies are clouding the picture for oil consumption.

“It’s amazing how strangely and quickly things have changed. I think the original move up to the mid $70s was completely not called for,” said Phil Streible, senior market strategist at RJO Futures in Chicago. “It was a lot of speculation over sanctions on Iran, Venezuela declining, Libya declining and who will pick up the slack.”

Hedge funds’ WTI net-long position - the difference between bets on higher prices and wagers on a drop - fell 14% to 242 855 futures and options in the week ended October 16, according to the US Commodity Futures Trading Commission. Longs fell 7.1%, while shorts jumped 38% to the highest since November 2017.

Bullishness may return, though, when the impact of sanctions on Iran kick in next month.

“This seems short term,” said John Kilduff, partner at Again Capital. “You have to be concerned about the lost Iranian supply coming up. We’re going to lose about 1 million, 1 million and a half that’ll finally register. The selling now seems to be a temporary blip.”

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