Enthusiasm over Brent crude’s rally just reached a new peak. As Opec increasingly signals an extension of output cuts and worldwide supplies tighten, hedge fund wagers on rising prices for the global benchmark broke a record set in September. Bets were placed as futures jumped above $60 a barrel, a level investors hadn’t seen in more than two years.
“Money managers are more bullish and for good reason. The fundamentals have improved. Opec’s plan is finally working,” Andrew Lebow, senior partner at Commodity Research Group, said by telephone. Inventories are declining and demand might be even stronger than some expected, he said.
Experts from Barclays to JPMorgan Chase & Co are raising their forecasts for Brent as support for a prolonged Opec-led deal grows. After Saudi Arabian Crown Prince Mohammed bin Salman said last week that “of course” he wants to extend the cuts, Iraq’s Oil Minister Jabbar al-Luaibi said he backs a nine-month extension and Kuwait’s oil minister sees one announced this month.
JPMorgan raised its 2018 Brent price forecasts by $11 a barrel, saying stockpile declines and tighter market conditions are sufficient to support spot prices close to $60, and Barclays raised its estimate for the fourth quarter by $6. Fitch Group Inc’s BMI Research also sees prices rising with tighter supply and demand.
“There’s been a lot of market chatter around the extension of cuts,” said Nick Holmes, an analyst at Tortoise Capital Advisors in Leawood, Kansas, which manages $16bn in energy-related assets. Saudi Arabia’s support signals there is a high probability of an extension, “causing some of the shorts to unwind their positions and put on some longs.”
Hedge funds raised their Brent net-long position – the difference between bets on a price increase and wagers on a drop – by 4.6% to 530,237 contracts in the week ended October 31, according to data from ICE Futures Europe. Longs jumped by 3.6%, also rising to a record high, while shorts slipped 5.4% to the lowest since February.
The West Texas Intermediate net-long position jumped by 20% to 281,244 futures and options, the most bullish position in three months, according to data from the US Commodity Futures Trading Commission. Shorts shrank 24%, while longs climbed 3.2% to the highest level since March.
In the fuel market, money managers boosted their net-long position on benchmark US gasoline by 16%, with long positions rising to a record high. Meanwhile, the net-bullish position on diesel jumped 11% to the highest on record.
In the US, crude stockpiles have decreased five of the last six weeks, now hovering at the lowest level since January 2016. At the same time, gasoline and distillate supplies have tumbled to levels last seen in 2015.
“We continue to see constructive crude draws and product draws in the US,” Holmes, said. “That fear of US oversupply has abated somewhat.”
Aside from the fundamentals, technical levels also paint a more bullish picture.
In New York, WTI’s 50-day moving average climbed above the 200-day one late last month, a bullish signal known as a golden cross. Prices have rallied more than 8% since that point. For Brent, the moving averages crossed in September. Both benchmarks remain above their 200-day moving averages.
“The fact that we are well above the 200-day moving average now, the 50-day crossed over the 200-day, people are trying to play that trade,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said in a telephone interview. Technicians aren’t “looking at fundamentals. They’re not looking at Opec meetings. They’re saying, technically, we should go higher here. And we could.” —Bloomberg