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Tumbling Oil Prices Punish Hedge Funds Betting on Gains

Hedge funds increased bets on rising oil prices just before crude futures tumbled to a 17-month low on signs that global supply is outstripping demand.

Prices capped the biggest weekly decline in two months after money managers boosted net-long positions in West Texas Intermediate by 4.1 percent in the seven days ended Sept. 30. Long positions climbed 2.7 percent, U.S. Commodity Futures Trading Commission data show.

WTI sank below $90 on Oct. 2 after Saudi Arabia, the world’s largest oil exporter, cut its prices toAsia. U.S. production is the highest since 1986, while OPEC output expanded to the most in a year. The International Energy Agency last month reduced its projections for demand growth this year and in 2015, citing a weakening economic outlook.

“Oil isn’t looking like a good bet anymore,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone Oct. 3. “Production continues to rise, flooding the market, while on a good day the demand picture looks anemic.”

Crude declined 0.4 percent to $91.16 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. The futures slid $1.27 to close at $89.74 on Oct. 3, the lowest settlement since April 2013. Prices gained 0.7 percent to end at $90.34 a barrel today in New York.

Saudi Arabia

Saudi Arabia reduced the price for Arab Light to Asia by $1 a barrel to a discount of $1.05 to the average of Oman and Dubai crude, the lowest since December 2008. Official selling prices are regional adjustments Aramco makes to price formulas to compete against oil from other countries.

Production by the 12-member Organization of Petroleum Exporting Countries rose to 30.935 million barrels a day in September, the highest since August 2013, a Bloomberg survey of oil companies, producers and analysts showed.

U.S. crude output reached 8.867 million barrels a day in the week ended Sept. 19, the most since March 1986. Production will climb to 9.53 million in 2015, a 45-year high, the Energy Information Administration said in its monthly Short-Term Energy Outlook on Sept. 9.

“Earlier this week there was a debate over whether prices had reached a bottom,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone Oct. 3. “Investors took a chance and gathered length. Sometimes when you put your toe in the water it gets snapped off.”

Downward Pressure

Net-longs for WTI advanced by 7,898 to 201,863 futures and options during the week ended Sept. 30. Long positions increased to 270,441, while shorts slipped 1.1 percent to 68,578.

In other markets, bullish bets on gasoline decreased 14 percent to 10,321 futures and options combined. Futures declined 1.6 percent to $2.5869 a gallon on Nymex in the reporting period.

Regular gasoline at the pump, averaged nationwide, slid 0.8 cent to $3.289 a gallon yesterday, the lowest since Feb. 8, according to Heathrow, Florida-based AAA, the largest U.S. motoring group.

Bearish wagers on U.S. ultra low sulfur diesel increased 10 percent to 29,867 contracts. The fuel decreased by 3.6 cents, or 1.3 percent, to $2.6472 a gallon in the report week.

Natural Gas

Net-long wagers on U.S. natural gas increased 22 percent to 115,355 contracts. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract.

Nymex natural gas surged 30.5 cents, or 8 percent, to $4.121 per million British thermal units during the report week.

Saudi Arabia told OPEC that it cut production in August by the most in 20 months. It will maintain the lower output until the end of the year as demand for winter fuel increases, a person familiar with its policy said Sept. 26.

OPEC may reduce its daily quota by 500,000 barrels to 29.5 million in 2015, Secretary-General Abdalla El-Badri said in Vienna on Sept. 16. Ministers are next scheduled to meet on Nov. 27 in Vienna.

Global oil consumption typically rises during the last three months of the year as the Northern Hemisphere winter increases use of heating fuels. The fourth quarter had the strongest demand in each of the past five years, IEA data show.

“The market should find a bottom soon,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.6 billion, said by phone Oct. 3. “At some point I expect OPEC to take some action while demand from the Northern Hemisphere heating season will provide some additional support.”

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