Hedge Funds Stocking Up

Jim Brown
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Hedge funds and other large speculators stocked up on crude futures for the first time in five weeks. The number of net longs increased by 8% in the week ended September 7th.

Net long positions increased +8% for the first weekly gain since the seven days ended on August 3rd according to the Commitment of Traders report. Crude prices rose +2.5% last week and the largest weekly gain since July.

Evidently the API data last week caused funds to add to long positions in expectations of a rise in prices. They got lucky with the oil pipeline leak and the shutdown of the Enbridge 6A line and the corresponding spike in prices.

Supplies in Cushing Oklahoma have fallen for five straight weeks and down -6% since the end of July to a total of 35.5 million barrels. Without the confusion surrounding the Enbridge pipeline this would have been bullish for oil prices as the October contract nears expiration on September 21st.

Net long positions rose by 6,262 contracts to 84,957 for the week ended on Sept 7th. That is still -37% off the highs at the start of August. Open interest in crude futures rose to 1.35 million contracts on September 3rd and the highest level since June. More than one million contracts changed hands on September 10th and that was the first time volume topped one million since May.

An analyst at Citi Futures Perspective said fund managers did get long but they did it by covering shorts. He said funds were buying back shorts placed on anticipation prices would fall before the Labor Day holiday.

Managed money switched to shorts on gasoline futures. New shorts outnumbered longs in the week ended on August 31st for the first time in almost four years. With the spike in gas prices it appears the gasoline shorts were slammed again.

The outage of the Enbridge pipeline is going to cause havoc with inventory numbers next week as will the twin hurricanes Igor and Julia. The pipeline may not be restarted until late this week and it is responsible for 300,000 bpd delivered to Cushing. The hurricanes cross the shipping lanes and tankers getting ready to make the ocean crossing from Africa and the Middle East will stall their journey until the storms pass in front of them and out of harms way.

I am pretty sure this was the problem with the API inventory report last week. The prior trio of storms coming from Africa caused tankers to delay and divert which interrupted the normal daily flow of tankers to the various ports in the Gulf of Mexico.

The continued storm generation and the 6A outage is going to make betting on inventory levels the next two weeks as very haphazard process.

Once the storms slow and the pipeline recovers we should have several weeks of strong inventory builds so be prepared.

Jim Brown

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