Hedge Funds Going Long

Jim Brown
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Net long positions on the New York Mercantile Exchange rose 67% in the week ended July 13th. This is the most since February 2007 according to the Commitment of Traders report.

Crude prices rose +5.4% in the week referenced in the report but declined four out of the last five days but only barely. Crude closed today near $76.50 but declining demand estimates could put an end to this upward trend.

Hedge funds suffered their worst second quarter in a decade losing -2.79% according to Hedge Fund Research's HFRX Global Hedge Fund Index.

Bloomberg's weekly news survey showed that 39% of analysts expect crude prices to decline through July 23rd. 36% expected no change and 25% expected an increase.

The gain in crude in the prior week saw net longs rise from 50,503 contracts, the lowest level in more than a year on July 6th. Moving from a 52-week low to a three year high suggests funds suddenly went extremely bullish but I don't see the fundamentals they must be seeing.

The declining economic trends are going to force the EIA and IEA to lower their demand estimates and that should pressure oil prices in the short term.

The NBS revised China's GDP numbers lower for 2009 and 2010 but said the current level is probably the bottom. They believe the government will return to a growth supporting bias by Q4. The downgrade on the GDP estimates to 10% from 11% for 2010 did not rattle the oil market.

BP stockholders were rattled this morning after engineers reported an oil seep near the damaged Macondo well. Immediately everyone thought the worst that the cashing had ruptured. Later in the day the seep was reported again as 1.8 miles from the well and not related to the BP well. Unfortunately BP stock did not recover.

BP is supposed to begin collecting oil again but the company is pressuring the Coast Guard to let them keep it sealed until the relief well is completed and the well plugged from the bottom. BP appears to be worried that something to do with the oil collection effort will risk dumping more oil into the water.

The Coast Guard issued a statement suggesting nothing had changed and they still expect BP to collect the oil. Most people don't realize that the government gets paid their royalty on the leaked oil just like they do on the collected oil. I suspect there is going to be a push to force BP to collect it so they know exactly how much has been flowing. BP now has capacity for up to 80,000 bpd but they have never had it all connected at the same time so the most they have ever captured was 25,000 bpd. If they are forced to capture it all and the number surges to 60-75,000 bpd then BP is liable for royalties on that much oil PER DAY dating back to when the riser was cut off. Plus there is a fine of up to $4,000 per barrel for allowing oil to discharge into the water. By establishing the full flow rate of the well it also establishes the ceiling on their fines.

BP may have capped the well but they have not capped their future cash flow problems. Stay tuned to see how they escape this oil flow trap.

Jim Brown

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