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Bulls buying crude as futures prices slide
First Published Sep 24 2012 08:17 am • Last Updated Sep 25 2012 09:27 am

Hedge funds increased bullish oil bets for a fifth straight week, ignoring falling prices, on speculation that the Federal Reserve’s latest round of economic stimulus will boost hiring and bolster demand.

Money managers added to net-long positions, or wagers on rising prices, by 5.6 percent in the seven days ended Sept. 18, according to the Commodity Futures Trading Commission’s Commitments of Traders report on Sept. 21. It was the highest level since May 1.

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Oil dropped 6.2 percent last week as more Americans than forecast filed for unemployment benefits, and the Energy Department reported that U.S. crude stockpiles grew more than expected. Speculators kept buying, buoyed by the Sept. 13 unveiling of the Fed’s third round of so-called quantitative easing and tensions in the Middle East.

"The bulls are stubborn," said Phil Flynn, a senior market analyst at Price Futures Group in Chicago. "They’re thinking this is the last big buying opportunity before the end of the year."

West Texas Intermediate crude, the U.S. benchmark, retreated $1.88 a barrel, or 1.9 percent, to $95.29 on the New York Mercantile Exchange in the week covered by the report, then slid another 2.5 percent to settle at $92.89 on Sept. 21. The contract extended losses today, dropping 1.3 percent to $91.71 a barrel at 9:33 a.m.

Oil rose 1.3 percent on Sept 13 after Fed Chairman Ben S. Bernanke said that the central bank will buy up to $40 billion in mortgage-backed securities a month in an effort to bolster the economy and reduce unemployment, which has remained above 8 percent for 43 months.

The Fed’s previous rounds of growth-boosting measures weakened the U.S. dollar and made commodity investments more attractive. QE2 began Nov. 3, 2010, and by April 29, 2011, crude had reached $113.93, the highest level since Sept. 22, 2008.

"It’s extremely bullish for oil in the long run," Stephen Schork, president of Schork Group Inc., a consulting firm in Villanova, Pennsylvania, said by phone Sept. 21. "We’re seeing inflation expectations really picking up. We’re debasing the dollar. That’s going to continue to attract investors and Wall Street into hard assets."

Oil began a four-day slide Sept. 17, with futures falling $3 in less than a minute that day, as October options neared expiration, and settled at $96.62.

The fuel slipped again on Sept. 18, retreating 1.4 percent, on speculation that Saudi Arabia may increase output to lower prices and FedEx Corp., the world’s biggest cargo airline, reduced its profit outlook, a sign that a slowdown in economic growth may curb demand.

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Oil tumbled 3.5 percent to $91.98 a barrel on Sept. 19 after the Energy Department reported that stockpiles gained 8.53 million barrels to 367.6 million. Analysts surveyed by Bloomberg predicted an advance of 1 million.

Futures settled at $91.87 Sept. 20 following signs that U.S. economic growth is stalling. Jobless claims decreased by 3,000 in the week ended Sept. 15 to 382,000, the Labor Department reported. The median forecast of 49 analysts surveyed by Bloomberg projected a drop to 375,000.

"The speculators have been buying on the way down and hanging on," Flynn said by phone Sept. 21. "A lot of people are looking at what’s happening in the Middle East and looking at QE3, and they’re not believing the bearish case."

The U.S. and Europe tightened sanctions against Iran this year to derail the country’s nuclear program, raising speculation that shipping may be disrupted in the Strait of Hormuz, a waterway on the Islamic nation’s coast through which about 20 percent of the world’s crude passes.

The restrictions have impeded Iran’s ability to export oil. Output has declined 23 percent this year through August, according to data compiled by Bloomberg.

Violent protests in Libya, including a Sept. 11 attack that killed a U.S. ambassador and three of his colleagues, has also spurred supply concern. The country’s production declined 56 percent last year as civil war shut ports and oil fields.

Oil rose 1.1 percent on Sept. 21, the first increase in five days, on signs that European leaders are nearing resolution of the region’s three-year-old sovereign debt crisis.

"You can think of the recovery in prices as something of a counterattack and an attempt to assert that it’s still a bull market," said Tim Evans, an energy analyst at Citi Futures Perspective in New York.

Net-long positions in WTI oil held by money managers, including hedge funds, commodity pools and commodity trading advisers, rose by 11,323 futures and options combined to 214,647 in the seven days ended Sept. 18.

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