Hedge funds are the most bullish on oil in almost a year as the U.S. shale boom unravels and demand for gasoline strengthens.
Signs that producers won’t be able to sustain a supply glut are intensifying, with the International Energy Agency calling a bottom for the price rout. U.S. output is near a 15-month low as companies from Anadarko Petroleum Corp. to Chesapeake Energy Corp. cut jobs and park rigs to conserve cash, while several missed debt payments. Meantime, U.S. gasoline consumption rose to the highest on record for this time of the year.
WTI crude has climbed nearly 50 percent from a 12-year low on Feb. 11. Prices may have passed their lowest point, the IEA said. U.S. production will drop to the lowest level since 2013 next year, according to the Energy Information Administration.
“We’ve got the bottom in for oil,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion. “Gasoline demand is improving, and we have a strong speculative participation in the market. You are building a base for oil to trade between $30 to $50.”
Speculators raised their wagers on rising prices for West Texas Intermediate crude at the same time as bets that futures will fall dropped. The decline in short positions was the biggest in data going back to 2006 during the week ended March 8, according to the U.S. Commodity Futures Trading Commission. The resulting net-long positions climbed to the highest level in almost five months.
WTI futures gained 6.1 percent in the CFTC report week. They closed at $38.50 on March 11, the highest settlement since Dec. 4.
U.S. gasoline demand averaged in four weeks increased to 9.33 million barrels a day in the period ended March 4, up for a sixth time and the highest level for this time of the year since EIA data started in 1991.
Refineries boosted their use of crude to 16.2 million barrels a day in the week ended March 4, also a seasonal record.
“The refinery utilization rate has been rising a lot,” said Bart Melek, head of commodity strategy at TD Securities in Toronto. “Gasoline demand is pretty strong. We’ll start to test new highs.”
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U.S. crude production will decline to 8.19 million barrels a day next year, the lowest level since 2013, the EIA said in its Short-Term Energy Outlook on March 8. The number of rigs drilling for oil in the U.S. shrank to 386, about a fourth of the total in October 2014 and the least in more than six years, according to Baker Hughes Inc. data.
“We are not drilling enough wells to replace the normal production depletion,” said James Williams, an economist at WTRG Economics, an energy-research firm in London, Arkansas. “U.S. production is definitely going to decline throughout the year.”
Speculators’ net-long positions in WTI gained by 39,509 contracts of futures and options combined to 174,949, CFTC data show. That’s the biggest increase since April and the highest level since October. Short positions fell by 38,233, the most in CFTC data going back to June 2006. Longs, or bets on rising prices, gained by 1,276.
In other markets, net bearish wagers on U.S. ultra low sulfur diesel fell by 4,283 contracts. Diesel futures climbed 9.1 percent in the period. Net bullish bets on Nymex gasoline increased 3,544 contracts as futures gained 6.5 percent.
“This is just the start of what is a long road to re-balancing ahead,” Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd., said in a report. “With supply losses rising, prices have little reason to test the lows again.”
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