Oct. 31 (Bloomberg) — Hedge funds increased bullish bets on West Texas Intermediate oil to the highest level since May on expectations the gap between the U.S. benchmark price and Brent, the standard for more than half the world’s crude, will continue to narrow.
Money managers boosted net-long wagers in futures and options by 15 percent in the week ended Oct. 25, according to the Commodity Futures Trading Commission’s Commitments of Traders report on Oct. 28. The premium of Brent over WTI shrank 22 percent during the period covered by the report as U.S. oil delivered to storage in Cushing, Oklahoma, rose 5.5 percent and the global benchmark contract fell 0.2 percent.
Brent dropped as the death of Colonel Muammar Qaddafi on Oct. 20 signaled the return to the market of Libyan oil, a competing product. WTI has risen as stockpiles at Cushing have fallen 25 percent from a record in April, clearing a glut at the hub for New York Mercantile Exchange futures. Demand for U.S. oil also pushed the price of the contract nearest expiration above futures expiring later, ending the so-called contango for the first time since Nov. 20, 2008.
“People have loved owning Brent and selling WTI, and you’re seeing an unraveling,” Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania, said in a telephone interview on Oct. 28. The narrowing of the Brent-WTI spread increased demand for contracts on the front of the futures curve, ending the contango, he said.
WTI futures rose $4.83 cents in the week of the report to $93.17 a barrel Oct. 25 on the Nymex. Futures for December delivery declined 83 cents to $92.55 as on noon in Singapore
Brent, which trades on London’s ICE Futures Europe, declined 23 cents to $110.92 in the week of the report. The contract’s premium over the Nymex WTI future reached a record $27.88 on Oct. 14. It narrowed today to $16.85.
The Libyan rebellion that erupted in February caused output from Africa’s largest reserves to drop 97 percent to 45,000 barrels a day in August, according to a Bloomberg News survey. Brent reached $126.65 a barrel on April 8, the highest since July 2008.
Libya’s interim government, known as the National Transitional Council, said Oct. 20 that it plans to expand production to about 1.7 million barrels a day within 15 months. Claudio Descalzi, head of exploration and production for Rome- based Eni SpA, said during an Oct. 27 conference call that the company will probably be able to produce about 120,000 barrels of oil equivalent a day in Libya in the fourth quarter.
The prospect of more Libyan production has put pressure on Brent and follows a reduction of Cushing stockpiles that has pushed WTI prices higher, said Richard Ilczyszyn, a senior market strategist at MF Global Holdings Ltd. in Chicago, by phone on Oct. 28.
Inventories in Cushing have declined to 31.5 million barrels since reaching record levels in April, according to Energy Department data. Cushing is the largest crude-trading and storage hub in the U.S.
Goldman Sachs Group Inc. said in an Oct. 4 report that producers have increased shipments by rail directly to the U.S. Gulf coast, reducing storage in Cushing as they bypass the hub.
WTI has traded at a discount to Brent since August 17, 2010, as a dearth of pipelines from Cushing limited southern- bound shipments of U.S. and Canadian oil, inflating supplies to a record 41.9 million barrels in April. Goldman predicted that the spread between Brent and WTI would collapse to $6.50 a barrel within 12 months.
Traders buying WTI forced the near-month future above later-dated agreements, Ilczyszyn said. Oil for December 2011 delivery settled on Oct. 24 at a 75 cent premium to the December 2012 contract after beginning the day at a $1.22 discount, a move of $1.97. The spread widened further on Oct. 25 to $2.36.
Managed money net-long positions in WTI, or wagers prices will rise, gained by 25,902 futures and options combined to 197,280, according to the CFTC. It was the highest level since May 31.
In other U.S. markets, net-long bets on heating oil held by managed money, including hedge funds, commodity pools and commodity-trading advisers, advanced by 4,025 futures and options combined, or 13 percent, to 34,126, the highest since the week ended Aug. 2, the CFTC data showed.
Wagers on gasoline rose 8,760 futures and options combined, or 17 percent, to 61,445, the highest since the seven days ending July 27.
Bets on four natural gas contracts increased by 1,283 futures and options combined, with short bets outnumbering longs by 12,152, the data showed. The measure of gas positions includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swaps, Nymex Henry Hub Penultimate Swaps and ICE Henry Hub Swaps. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.
–With assistance from Alessandra Migliaccio in Rome and Margot Habiby in Dallas. Editors: Dan Stets, Bill Banker
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