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Published On: Mon, Dec 8th, 2014

As oil price hits five-year low, Hedge funds predict end to crash

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Oil Price

Oil Price

By Ese Awhotu

The price of oil has hit another five-year low as fears of oversupply continue to mount.

Brent crude was down $1.77 at $67.30 a barrel on Monday afternoon trading; having earlier hit $66.77 – it’s lowest since October 2009.

US crude was down $1.44 at $64.40, after falling as low as $64.14.

Morgan Stanley predicted that Brent would average $70 a barrel in 2015, down $28 from a previous forecast, and be $88 a barrel in 2016.

The investment bank also said that oil prices could fall as low as $43 a barrel next year. Analyst Adam Longson said that markets risked becoming “unbalanced” unless the OPEC producers’ cartel decided to intervene.

Saudi Arabia, the cartel’s biggest member, resisted calls at last month’s meeting to cut production despite the slide in prices, which have fallen more than 40% since June.

Kuwait, another OPEC member, said that oil prices were likely to remain about $65 a barrel until the middle of next year unless OPEC cut output.

BBC reports that the further falls in the oil price put more pressure on both the rouble and Russian stock markets, with the currency losing 2.2% against the dollar at 53.66 and down 1.8% against the euro at 65.80 in afternoon trading.

Some analysts believe that Russia will increase interest rates to as much as 12% this week in a bid to prevent a full-blown financial crisis.

Last week, the Russian government warned that the economy would fall into recession next year as the falling oil price and Western sanctions, in response to its role in eastern Ukraine, take their toll.

Russia’s economic development ministry estimates the economy will contract by 0.8% next year after previously estimating growth of 1.2% for 2015.

According to the BBC, global confidence was also undermined on Monday after European Central Bank governing council member Ewald Nowotny warned that the euro zone economy was experiencing a “massive weakening”, sending the euro lower against the dollar and the pound.

The head of Austria’s central bank is keener than Germany on the idea of the ECB introducing more money printing, or quantitative easing, and using the funds to buy government bonds in a bid to help stimulate flagging European economies.

Markets were also unsettled by official data showing that China’s export growth slowed sharply in November, while imports surprisingly contracted, resulting in a record monthly trade surplus.

Tony Cross, market analyst at Trustnet Direct trading group, said the figures indicated that the world’s second-largest economy was slowing down: “Chinese trade data fell well short of expectations and this has sent traders scurrying for the exits as the new week gets under way.”

Meanwhile, figures showing that the Japanese economy contracted more than initially thought in the three months to 30 September hit the yen, sending the dollar to a seven-year high.

Gold edged up $1.25 to $1,195.25 an ounce in London.

However, despite the sliding oil prices, Hedge Funds are betting that the oil-price crash is close to ending.

Speculators boosted their net-long position in West Texas Intermediate crude by 14 percent in the week ended Dec. 2, the most in 20 months, U.S. Commodity Futures Trading Commission data show. Short bets contracted by 15 percent as long wagers expanded 4 percent.

Oil’s collapse accelerated after the 12-nation Organization of Petroleum Exporting Countries decided Nov. 27 to maintain output levels, underscoring the price war in crude. Oil tumbled into a bear market in October and reached a five-year low last week as the U.S. shale boom added to a global glut at a time of weakening demand growth.

“A lot of people are betting that the selloff is overdone,” John Kilduff , a partner at Again Capital LLC, a New York-based hedge fund (USO) that focuses on energy, said by phone Dec. 5. “We haven’t seen these levels in years. They represent extreme value to some folks. “According to a report published by the petroleum world

WTI slumped $7.21, or 9.7 percent, to $66.88 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. Prices extended declines from the lowest close in more than five years dropping 73 cents to $65.11 in electronic trading on the New York Mercantile Exchange at 12:42 p.m. Singapore time. Brent, the global benchmark, slid 81 cents to $68.26.

The price floor is now at about $60 or even less, companies including Deutsche Bank AG, BNP Paribas SA and Petromatrix GmbH said at the end of last month.

OPEC, responsible for about 40 percent of the world’s oil supply, kept its collective output target at 30 million barrels a day. WTI plunged a combined 10 percent that day and the next.

“There is a case for the longer-term investor that sees a discount in current prices,” Harry Tchilinguirian , BNP Paribas SA’s London-based head of commodity markets strategy, said by phone Dec. 5. “If your investment horizon is indeed long term, oil prices will be reversed higher.”

Shares outstanding of the four biggest U.S. exchange-traded funds that follow oil prices, including the United States Oil Fund and ProShares Ultra Bloomberg Crude Oil (UCO) , increased to 86.9 million on Dec. 4, the most since January 2013, according to data compiled by Bloomberg.

Investors added $98 million into the four funds in the first four days of the month, following a $559.85 million inflow in November that was the most since June 2012.

“People are thinking that we’ve hit the bottom and it can only go up,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone Dec. 5. “$70 is the new $100.”

Banks including BNP Paribas and Barclays Plc cut their price forecasts after the OPEC decision. BNP reduced next year’s WTI estimate to $70, from $88, and Barclays to $66, from $85.

U.S. crude output reached 9.08 million barrels a day in the week ended Nov. 28, the most in government data started in 1983.

Saudi Arabian Oil Co., the state-run oil company , offer Asian customers the biggest discount on its benchmark crude in at least 14 years, heightening speculation the country is lowering prices to defend market share. It also reduced prices for all grades sold to U.S. refineries.

Net-long positions for WTI jumped by 22,365 to 184,374 futures and options. Long positions rose 4 percent to 256,667. Short bets dropped to 72,293, according to the CFTC. Even with the gains, the net-long position is still about half of what it was in June.

Speculators have misjudged markets before. They increased the net-long position by 8.7 percent in the week ended Nov. 11, only for prices to drop 16 percent since then.

In other markets, bullish bets on gasoline increased 8.2 percent to 43,022 contracts. Futures tumbled 11 percent to $1.8116 a gallon on Nymex in the reporting period.

Regular gasoline at U.S. pumps dropped 1.7 cents to an average $2.711 Dec. 4, the least expensive since October 2010, according to AAA.

Bearish wagers on U.S. ultra low sulfur diesel narrowed 9 percent to 20,345 contracts. The fuel sank 10 percent to $2.1544 a gallon in the report week.

WTI tumbled to $32.40 in December 2008 from a record $147.27 that July, prompting OPEC to cut quotas by 2.46 million barrels a day.

“A lot of people thought that once the market dropped so dramatically, it didn’t have that much further to go,” Phil Flynn , senior market analyst at the Price Futures Group in Chicago , said by phone. “It’s almost like a sense of denial of what’s going on.”

For countries like Nigeria which is solely dependent on oil, Hedge Funds bet is a sure hope array for its economy that has plunged into austerity to survive the crashing oil prices.

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