Oil bulls’ will broken as roiled economies pose risk to growth

NEW YORK (Bloomberg) -- Speculators retreated from bullish oil bets at the fastest pace since 2012 on mounting concern that economic turmoil in Europe and Asia will prolong a supply glut.

The net-long position in West Texas Intermediate crude fell 20% in the week ending on July 7, U.S. Commodity Futures Trading Commission data show. Longs dropped 1.7% as short wagers jumped 56%. In contrast, funds raised bullish bets on Brent crude to a five-week high.

U.S. benchmark crude slumped 12% in the CFTC report period as the Greek debt crisis intensified and plunging stocks in China threatened to slow the world’s second-biggest economy. Delays in Iran reaching a nuclear accord and lifting curbs on its oil exports did little to stem the rout. Prices may fall further because the world remains “massively oversupplied,” the International Energy Agency said.

“Several bearish elements came together to break the back and will of the longs in the market,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone on July 10. “The oversupply here is just not going away.”

WTI futures fell $7.14 to $52.33/bbl on the New York Mercantile Exchange in the CFTC period. The U.S. benchmark grade dropped 1.2% to $52.12/bbl in electronic trading at 1:45 p.m. in London on Monday.

Greek Vote

Crude dropped 7.7% on July 6, a day after voters in Greece rejected a referendum on more spending cuts and tax increases. Prime Minister Alexis Tsipras surrendered on Monday to European demands for immediate action to qualify for up to 86 billion euros ($95 billion) of aid Greece needs to stay in the euro.

“Greece is adding a lot of uncertainty into the market,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said by phone on July 10. “We can head below $50 if a deal is reached with Iran.”

In China, the second-largest oil-consuming country after the U.S., the main Shanghai Stock Exchange Composite Index plunged 13% in the CFTC week. Officials have unveiled market-boosting measures almost daily over the past two weeks to revive investor confidence.

“The big deal for oil probably is China,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion, said by phone on July 9. “The drop in the Chinese stock market raises the potential that the economy will follow.”

Vienna Meetings

Foreign ministers meeting in Vienna missed a July 10 deadline and now have through Monday to resolve the remaining issues in an accord with Iran that could lift bans against oil exports.

Iran has urged OPEC to make way for it to pump 4 MMbopd when sanctions are lifted. The country produced 2.85 million in June, according to data compiled by Bloomberg.

More oil from Iran would add to a global glut. OPEC pumped 32.1 MMbopd in June, the most since August 2012, according to data compiled by Bloomberg.

In the U.S., weekly production reached 9.6 MMbopd on July 3, near the 9.61 million a month earlier that’s the highest level since Energy Information Administration weekly records started in 1983.

The net-long position in WTI dropped 42,426 to 173,726 futures and options combined in the week ending on July 7, the CFTC said. Longs fell 4,826 and shorts gained 37,600.

Brent Positions

Speculators raised net-long positions in Brent, the European benchmark by 7,117 contracts to 205,810 in the same period, data from the London-based ICE Futures Europe exchange showed Monday. It was the highest level since June 2.

In other markets, bullish bets on Nymex gasoline fell 54% to 7,854. Futures dropped 6.7% to $1.9494 a gallon on the exchange in the reporting period.

Bearish wagers on U.S. ultra low sulfur diesel more than tripled to 17,450. The fuel slipped 9.3% to $1.7113 a gallon.

The net-short position on U.S. natural gas gained 11% to 93,194. The measure includes an index of four contracts adjusted to futures equivalents. Nymex gas fell 4.1% to $2.716 per million British thermal units.

U.S. crude stockpiles increased to 465.8 million barrels in the week ending on July 3, more than 90 million above the five-year average, according to the EIA.

“This is a bad combination of high inventories and a change in economic expectations because of Greece and China,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Mass., said by phone July 10. “A possible deal with Iran will bring us more oil. It’s quite possible that we could go back to the $40 area.”