Hedge funds are rooting for a quick collapse of the US shale boom.
Money managers turned the most bullish since May as West Texas Intermediate crude climbed to a five-month high on optimism that falling US production and rising fuel demand will trim the global glut. Investors shrugged off an inventory gain that left supplies at the highest since 1929.
“The market’s focused not on current oversupply but on predictions of a balance in the second half of the year,” said Mike Wittner, head of oil markets at Societe Generale in New York. “Managed money is just adding to the upward momentum.”
Speculators’ net-long position in benchmark US crude climbed to the highest since May 12 in the week ended April 26, according to data from the Commodity Futures Trading Commission. Short positions dropped to a 10-month low.
Energy companies responded to the lowest prices since 2003 earlier this year by cutting spending on exploration and developing new fields. The number of active oil rigs fell to 332 last week, the least since November 2009, according to Baker Hughes. The total is down to less than one-fourth of the 2014 peak.
US crude production fell to 8.94mn bpd in the week ended April 22, the least since October 2014, Energy Information Administration data show. The agency on April 12 cut its average forecast for the whole year to 8.6mn bpd. Output from US shale formations will drop in May to the lowest level in almost two years.
“Supply in the US is falling pretty quickly, and globally, in the second quarter of this year for the first time in more than three years we are going to have a contraction in global output,” Francisco Blanch, head of commodities at Bank of America Merrill Lynch in New York, said on Bloomberg Television on Friday. “That combination of lower supply and robust demand will lead to a change of inventory dynamics in the second half of the year.”
US drivers are doing their part. Gasoline consumption over the past four weeks was up 5.6% from a year earlier at 9.4mn bpd through April 22, EIA data show.
Speculators’ net-long position in WTI rose 3,136 futures and options combined to 249,123, CFTC data show. Short positions, or bets that prices will decline, tumbled 6.9%, while longs slipped 0.5%.
In other markets, net bullish bets on Nymex gasoline rose 11% to 25,964 contracts. Gasoline futures increased 5.8% in the period. Net bearish wagers on US ultra low sulphur diesel decreased 93% to 529 contracts, the least bearish position since July 2014, as futures climbed 5.5%.
Rising Opec production leaves the oil market vulnerable to a correction, said Tim Evans, an energy analyst at Citi Futures Perspective in New York. The Organization of Petroleum Exporting Countries boosted production by 484,000 bpd to 33.217mn in April, the most in monthly data going back to 1989, a Bloomberg survey of oil companies, producers and analysts showed.
“More buying now will result in more selling later,” Evans said. “At some point rising Opec production will be recognized as more than offsetting the drop in US production.”
First US shale gas exporter is ready for commercial service
Cheniere Energy’s Sabine Pass terminal, the first to send US shale natural gas abroad, is ready to operate commercially, paving the way for more cargoes to leave the nation.
Cheniere asked US regulators for approval on Friday to place the first gas liquefaction plant, known as Train 1, at the Louisiana terminal into commercial service after testing confirmed it can be operated “safely and reliably,” a filing shows. The company began testing equipment at the plant last fall and has shipped seven cargoes of liquefied natural gas abroad since late February as part of the commissioning process.
Once in commercial service, the terminal is scheduled to start sending contracted cargoes to Royal Dutch Shell’s BG Group unit, which signed a supply agreement with the exporter four and a half years ago. Cheniere’s marketing unit also has contracts to supply gas from Train 1 to Japan’s Kansai Electric Power Co and Chubu Electric Power Co, according to Poten & Partners.
The commissioning itself would entail engineering and construction company Bechtel Corp handing over the plant to Cheniere for operation. Cheniere needs final approval from the Federal Energy Regulatory Commission before beginning commercial operations.
“Sabine Pass has filed all documentation required by FERC staff demonstrating readiness for Train 1,” Cheniere said. “Commissioning demonstration tests which confirm the facilities can be operated safely and reliably have been successfully completed.”
The global gas market has shifted dramatically since Cheniere began seeking export approval from the government in 2010. A surge in shale supplies from Pennsylvania to Texas have dragged down gas prices by more than 80% in the past eight years. That turned the US into one of the biggest and cheapest gas producers in the world while global LNG prices were buoyed by their link to pricier crude contracts.
After mid-2014, the shale boom caught up to the crude oil market, contributing to a global supply glut that caused prices to collapse. The discounts for US gas that were more than $15 per million British thermal units compared with Northeast Asia in late 2013 narrowed to $2 in April.
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