Why hedge funds lose faith in oil before Harvey?

Hedge funds lose faith in oil before Harvey hits demand centre. A refinery stands in the background as a pump jack operates in an oil field near Corpus Christi, Texas. Hedge funds lost faith in oil just before the worst storm to hit the US since 2004 struck the heart of energy production in Texas.

Hedge funds lost faith in oil just before the worst storm to hit the US since 2004 struck the heart of energy production in Texas. Short-sellers boosted bets on declining West Texas Intermediate prices by the most since June in the week ended August 22 as futures chopped around $47 a barrel without a clear direction. Harvey smashed ashore on Friday as a Category 4 hurricane, flooding a region whose refineries process 5mn barrels of oil a day. Anticipation that the storm would pare crude demand pushed prices down a day after declining US stockpiles had triggered a rebound. Futures ended the week 1.3% lower, without enough conviction from bears or bulls to break out of a tight range.

“We’ve had really quiet market action, so it’s easy to get frustrated,” Rob Haworth, senior investment strategist at US Bank Wealth Management in Seattle, which oversees $142bn of assets, said by telephone. “If you are a commodities trader, I’d think you’ve got to be frustrated with the lack of action in oil.” Refiners shut more than 2mn barrels a day of capacity in Texas because of the storm, according to company statements, government reports and people familiar with the situation. About 379,000 barrels a day of crude production was shut in the Gulf of Mexico.
Oil in New York has lost about 5 percent this month as investors weighed rising global output from producers such as the U.S. against production cuts
Further disruptions to oil production and shipments could flip the market to more bullish sentiment. Investors will likely get out of their short positions, according to Andy Lipow, president of consultant Lipow Oil Associates in Houston, said by telephone. Aside from Gulf of Mexico production being halted, operators shutting pipelines due to Harvey in locations such as the Eagle Ford shale will affect the ability of oil to be delivered to market, he said. While American inventories have been on a steady decline since late June and the drilling ramp-up in shale fields is slowing down, wells in Texas and elsewhere in the US are gushing an increasing amount of crude set to average nearly 10mn barrels a day next year.
Prices in New York were on track for the worst August since 2011, dropping below two key levels this month – the 100-day and 200-day moving averages. Apart from an even more tedious February, futures have traded in the tightest monthly range in more than a decade. Hedge funds decreased their WTI net-long position – the difference between bets on a price increase and wagers on a drop – by 21,467 to 252,974 futures and options in the week ended August 22, data from the US Commodity Futures Trading Commission show. That was the biggest drop since late June. Longs dropped 3.8%, while shorts climbed by 9.3%.
“We’re stuck in a range. Once we break out of this range, then I think you’ll start to see one side pick up a little bit more,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said by telephone. “If you get closer to $49, you may see some longs being added for that potential break-out and if you start coming off pretty hard, you may see some shorts start getting back into the market.”
In fuel markets, the net-long position on the benchmark US gasoline contract declined 7.5%, while the net-long position on diesel plunged 38%.
“My hope has been that as investors were given further evidence of inventory draw-downs, both in the OECD and in the US, that you would have seen that expressed in a higher spot and higher strip price for oil,” Eric Nuttall, senior portfolio manager with SPR & Co, the interim holding company following Sprott Asset Management’s recent management-led buyout. “That has not occurred yet.’