By Irina Slav
Hedge funds are buying oil once again after a pause earlier in March, signaling returning optimism about U.S. – China relations and subsiding concern about the global economy, Reuters’ John Kemp said in his latest column on hedge funds and oil bets. Even with the renewed optimism, however, the buying remains cautious, Kemp notes.
Crude oil prices have been rising pretty steadily recently, helped higher by OPEC’s production cuts and the U.S. sanctions against Venezuela and Iran, while reports from the negotiating table between Washington and Beijing have been positive. Yet a further rise in prices is far from certain despite a recent report that said Saudi Arabia needed Brent at more than US$70- to balance its budget this year.
To this end, the Kingdom has been cutting more production than it was obliged to, in a counterintuitive, potentially self-harming move. It has also been cutting exports, effectively ceding market share to other suppliers. Meanwhile, Russia has not yet reached 100 percent compliance with its own production quota.
Brent is currently trading at above US$67 a barrel, with West Texas Intermediate at US$59.94 a barrel at the time of writing, both are trading slightly higher. They were both, however, higher than they were in the week to march 19, when, Kemp reports, hedge funds bought some 65 million barrels of crude, of which 50 million barrels of WTI and 16 million barrels of Brent.
The ratio between long and short positions on oil among funds is now five to one, which is certainly a sign of returning confidence in the capability of the oil market to keep prices rising. Yet it is far from the 12-to-one ratio that was recorded last September, just before prices fell off a cliff, by the way.
Despite the apparent nonchalance regarding the global economy, the concern is still there and economists are reminding us about it on a daily basis. Slowdown is expected for key economies such as China and India, as well as in Southeast Asia. In early March, Fitch cut its projection for the Indian economy to 6.8 percent from 7 percent, and that itself was a cut from a December revision from 7.8 percent. Meanwhile, China cut its own economic growth forecast for this year to 6-6.5 percent from “about 6.5 percent”.
Any news about economic growth projection cuts in either of these countries immediately pressures oil prices and currently explains hedge funds’ relative caution in increasing their long bets on the world’s most used commodity. Even with tensions between China and the U.S. quieting, the issue with economic growth in the world’s second-largest importer will remain an obstacle to a sustained price rise in the observable future.
There is also the question of U.S. shale, of course. While OPEC is cutting—mostly heavier grades—the U.S. is pumping more. U.S. shale is perhaps the strongest headwind for prices right now and any further reports about production increases from the EIA are bound to weigh on WTI and even Brent.
Finally, there is President Trump and his aversion to much higher oil prices. Trump has so far addressed OPEC several times via Twitter, accusing the cartel of leaving prices to rise too high. Every time this has happened, the price rally has cooled off quite quickly. We might be in for another OPEC tweet soon since Brent at US$66 is a bit above Trump’s apparent maximum tolerance for oil prices.
By Irina Slav for Oilprice.com