Volatility ahead for U.S. crude as investors split bets

*Crude oil supply vessel.

*Crude oil supply vessel.

17 August 2016, New York — U.S. crude oil is set for a volatile path ahead as both bullish and bearish wagers soar to record levels, with even large Wall Street banks at odds with future trends.

Total long positions have risen to the highest level in over a year, while short positions climbed to a fresh record high, data from the U.S. Commodity Futures Trading Commission (CFTC) on Friday showed.

“It does set you up for a bit of a push-pull situation between the bulls and the bears,” said Michael Tran, director of the energy strategy at RBC Capital Markets in New York.

“If we’ve learned anything about the oil market, it is that sentiment is extremely fragile.”

The data suggests crude oil markets could be at a tipping point after a rally pushed Benchmark West Texas Intermediate (WTI) crude futures up 17 percent over 9 days. [O/R]

Investors rushed to cover bearish positions after forecasts for a tight market in the second half of the year and potential joint action from OPEC and non-OPEC members to stabilize the market. The rally has now also brought in buying from those who believe the worst is over, traders said.

The CFTC data showed total long positions in U.S. crude rose to the highest since May 2015 at 322,594 contracts. Bearish positions continued to increase, hitting 220,139 contracts in the week to Aug. 9, the data showed.

Traders have piled into bearish put options, with open interest in $40 put options for October delivery soaring to record highs over the last week.

In addition, open interest in the front-month contract climbed to the highest in three years during the week, Reuters data showed, highlighting investors’ increased appetite for exposure.

More than 17,000 lots of $47 call options for September delivery had traded by Monday afternoon, and at the same time about 11,500 contacts of $45 put options had changed hands.

The surge in both bearish and bullish bets reflects mixed views from experts on the supply and demand situation for the rest of the year.

The International Energy Agency (IEA) said last week it expected oil markets to tighten gradually in the second half of 2016 as global demand growth slows and non-OPEC supplies rebound.

Standard Chartered is broadly in agreement, saying in a report on Monday that the supply surplus in oil is over.

But Morgan Stanley, also in a report on Monday, said it “vehemently” disagreed with the IEA’s assessment of a 1 million-barrel-per-day crude oil stock draw in the third quarter. It added that the supply-demand picture appears skewed negatively over the coming months.

*Devika Krishna Kumar; Editing – Jonathan Oatis – Reuters

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