- Hedge funds increase bullish bets, especially in Brent crude
- WTI crude has rallied, but near-term nervousness still persists
- First signs cut in US oil rigs is negatively impacting production
Crude oil, both WTI and Brent crude, has stabilised following the strong rally earlier this month.
The rally was driven by lower US production and geopolitical risk in the Middle East which has faded during the past week. Investment flows remain mixed with ETF investors heading for the exit while hedge funds continue to increase bullish bets, especially in Brent crude.
The rally so far this April and the sense that the worst is now over in terms of price weakness has helped trigger a further reduction in volatility from the elevated levels witnessed back in February.
While WTI crude has rallied strongly, options traders have been very reluctant to sell put volatility which could indicate that some near-term nervousness still persists. We issued a#SaxoStrats on June options in WTI crude options yesterday, which looked to buy the 56/52 put spread on the increased risk of a near-term pull-back in the price.
The list of the most traded options during the past week has an even distribution among puts and calls while the top three most traded are all puts. Not least the June 50 Put that expires on May 14.
Rising inventories have acted as a drag on WTI crude as the current and rising supply glut continues to put relative price pressure on prompt crude thereby keeping the futures curve in contango. Such a curve formation as we have highlighted on previous occasions is not good news for investors in crude oil, especially those investing through oil ETFs. During the past five weeks some $1.5 billion or one-quarter of the increase so far this year has been pulled from US energy ETFs.
This was highlighted in a recent article in the WSJ. In it they wrote: “The structure of the futures market may also be spooking some investors away from ETFs. Many crude-oil ETFs hold futures contracts continuously, meaning that when a futures contract nears expiration, the fund will sell it and buy a later-dated contract. Currently, later-dated crude-oil contracts are more expensive than the front-month contract.”
“In 2009, after oil’s last big selloff, front-month oil futures surged 78%, while the U.S. Oil Fund only gained 19%. Similarly, oil futures have gained 7.3% in the year to date, while the U.S. Oil Fund has fallen 3.4%”
The month-long crude price rally may have run its course. Photo: iStock
Turning the attention to today’s inventory report, traders will be keeping a close eye on both inventory and production levels. As the below charts shows we have seen 15 consecutive weeks of rising inventories with the total approaching 500 million barrels.
The support to WTI crude oil in recent weeks however has been the first signs that the dramatic cut in US oil rigs since last October is finally beginning to have a negative impact on production. In three out of the past four weeks production has been falling.
Ole Hansen is head of commodity strategy at Saxo Bank