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Hedge Funds Cut Oil Bets After Worst Drop Since 2008

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Oil bulls finally caught a break as prices capped their first weekly advance since November.

Hedge funds raised their net-long position in West Texas Intermediate crude by 12 percent in the week ended Jan. 13, U.S. Commodity Futures Trading Commission data show. Long wagers jumped the most since March 2011.

WTI climbed 6.1 percent in the three days following the report period, after dropping more than 50 percent since June. U.S. oil drillers took a record number of rigs out of service since Dec. 5, spurred on by OPEC’s decision to maintain output. Production growth will slow this year among countries outside of OPEC, the International Energy Agency said Jan. 16.

“People are willing to buy into the market at these price levels,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone Jan. 16. “It suggests that they think that the odds of us going much lower are small.”

WTI fell $2.04, or 4.3 percent, to $45.89 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report, dropping to $44.20 on Jan. 13, the lowest price since 2009. Futures rallied to $48.69 by Jan. 16, bringing the advance for the week to 0.7 percent. WTI traded at $48.20 at 10:31 a.m. London time.

Oil ETFs

Investors have put $1.11 billion into the four biggest oil exchange-traded products so far this month on top of $1.23 billion in December, the biggest monthly gain since 2010, according to data compiled by Bloomberg.

The IEA lowered its non-OPEC supply growth estimate by 350,000 barrels a day last week, the first cut since the 2015 forecast was introduced in July. That will lead to a “rebalancing” of oversupplied markets in the second half, reviving prices, the agency said.

The U.S. Energy Information Administration reduced its 2015 U.S. production outlook in a Jan. 13 report by 10,000 barrels a day to 9.31 million.

The drop in the U.S. oil rig count of 209 was the steepest six-week decline since Baker Hughes Inc. (BHI) began tracking the data in July 1987. The total tumbled 55 in the week ended Jan. 16 to 1,366.

“The rig count fell pretty dramatically and people were speculating that there could be more cutbacks in production,” Phil Flynn, senior market analyst at the Price Futures Group inChicago, said by phone Jan. 16. “That was a momentum changer.”

OPEC Production

The Organization of Petroleum Exporting Countries kept its output above quota for a seventh month in December, according to data compiled by Bloomberg. The group, which pumps about 40 percent of the world’s oil, decided in a November meeting to maintain its production target, favoring market share over higher prices.

Goldman Sachs Group Inc. said last week that U.S. crude oil may fall below the bank’s six-month forecast of $39 and rallies may be thwarted by the speed at which any lost shale output can recover. WTI may fall to $32 by the end of this quarter, Francisco Blanch, an analyst with Bank of America inNew York, said Jan. 15.

“You can always undershoot to the downside,” Jeff Currie, Goldman’s head of commodities research, said Jan. 14 in an interview on Bloomberg Television’s “Surveillance.”

CFTC Data

Net-long positions for WTI gained 24,637 to 224,032 futures and options in the week ended Jan. 13, according to the CFTC. Long positions jumped 38,569 to 311,973 and short bets climbed 13,932 to 87,941.

In other markets, bearish wagers on U.S. ultra low sulfur diesel increased 23 percent to 29,273 contracts as the fuel dropped 5.4 percent to $1.633 a gallon in the report week.

Net short wagers on U.S. natural gas gained 70 percent to 17,513. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Nymex natural gas gained 0.2 percent to $2.943 per million British thermal units in the week covered by the report.

Bullish bets on gasoline fell 15 percent to 37,255. Futures slumped 6.3 percent to $1.2685 a gallon on Nymex in the reporting period.

Regular retail gasoline dropped 0.8 cent to an average of $2.068 a gallon Jan. 17, the lowest since May 2009, according to Heathrow, Florida-based AAA, the country’s largest motoring group.

“These are extraordinarily cheap price levels that attract people to bet on a rebound,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone Jan. 16. “The lower price is luring bargain hunters.”

To contact the reporter on this story: Moming Zhou in New York at [email protected]

To contact the editors responsible for this story: Dan Stets at [email protected] Bill Banker

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