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Speculators In Oil Keep Getting It Wrong

At the end of last November, I wrote about my skepticism around OPEC’s ability to control oil prices. I was commenting that I didn’t understand what the speculators could possibly be thinking as the cost of extracting American oil was coming down and fast as US stocks continued to grow. Today, I read on Reuters that the oil price is falling with WTI near a 6-month low as ‘mounting concerns about global oversupply wiped out price gains since OPEC sealed a landmark accord to cut output‘. Once again, I have to ask myself what are people thinking?

I would like to see higher oil prices – higher commodity prices in general in fact – but we are going to have to wait a bit longer. Meanwhile, I am in good company it would appear as Reuter’s write John Kemp observes that hedge funds are losing faith in OPEC’s ability to deliver telling us ‘Hedge funds and other money managers cut their combined net long position in the three main futures and options contracts linked to Brent and WTI by 139 million barrels in the week to April 25. The reduction was one of the largest weekly falls on record, and reverses a cumulative increase of 140 million barrels over the previous three weeks, according to data from regulators and exchanges. Fund managers are now much less bullish about the outlook for crude oil prices than they were back at the start of the year.

Anyone who has followed my writings over the years will know that I am no fan of hedge funds. Back in 2005/2006, I investigated the hedge fund phenomenon with Peter Fusaro – we even wrote a book about them – meeting literally tens of fund managers in London, Geneva, Chicago, New York, and so on. I’m sorry. I was largely underwhelmed and unimpressed at these financial millionaire whizz kids whose strategies, when you got right down to it, was to be long. Yep. When the commodity prices crashed, they were still long and mainly out of business – which is were they should have been in the first place knowing nothing about commodities or energy but being good at hustling money from their rich buddies. Now, there were some exceptions. Some brilliant commodity specialists who I truly respect and admire but the vast majority of them were simply jumping on hot money in a hot sector. So having given you my forthright views on hedge funds in commodities, you will understand when I say again – what were/are they thinking?

The fundamentals of oil right now are this simple. A massive glut floating the world’s oceans on tankers with no market, US production surging and showing no signs of abating as exploration levels have increased in recent months – U.S. production rose by more than 450,000 barrels per day (bpd) in the five months ending in February, according to the U.S. Energy Information Administration (EIA), and an increasingly blind and ineffective OPEC whose only success in recent months at trying to intervene in oil markets appears to have been to make US production even more economic than it was now talking about extending production cuts by another 6-months.

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My prediction for what it is worth is that barring some totally unexpected and unforseen event, oil will continue to hover in weakness as oversupply dominates. I’m in the same place I was at the end of November. I see nothing – even production cuts by OPEC – to drive prices higher.

So, if you have money in an oil hedge fund – I’d put it somewhere else. However, please do note I am not an investment advisor and do not give such advice… I’m an industry analyst who watches trends rather than talking up the price of oil

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