Oil Price Optimism Wears Off as Texas Wildcatters Drill On

(Bloomberg) -- The relentless drilling ramp-up in America's top shale plays is making investors more skeptical that an oil price rebound is on the horizon.

After increasing their bets on rising West Texas Intermediate crude for three straight weeks, money managers slashed the wagers by 21 percent, according to U.S. Commodity Futures Trading Commission data. Producers in Texas are leading the longest shale revival since 2011, making OPEC-led efforts to rebalance the market increasingly difficult.

After the year started on a bullish note, with prices in New York topping $55 a barrel as Saudi Arabia, Russia and other major exporters began to cut production, the rally has staggered. Saudi Arabia's Energy Minister Khalid Al-Falih has admitted the first three months of supply curbs failed to bring inventories below the five-year average. As optimists lose heart, prices fell back below $50 last month.

There's still a lot of talk about high inventory levels, Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by telephone. Investors felt that prices had “gone up too much compared to the fundamentals. The shale oil production trend is definitely bullish, which is bearish for prices.”

This month's production in the top U.S. shale plays will reach about 5.2 million barrels a day, the highest level since November 2015, according to the Energy Information Administration. As producers pour billions of dollars of investment into fields like the Permian and Eagle Ford in Texas, the country's oil-rig count has more than doubled in a year to 697 last week, according to Baker Hughes Inc.

Deal Extension

Meanwhile, major exporters reached an initial agreement to extend output cuts, Al-Falih said April 20. Mohammad Barkindo, secretary-general of the Organization of Petroleum Exporting Countries, said last week that all producers are steadfast in their commitment to pare production, and Russia's Energy Minister Alexander Novak said the country will reach its fully agreed 300,000 barrel a day cut as promised.

As questions remain if the exporters will eventually succeed, hedge funds decreased their net-long position, or the difference between bets on a price increase and wagers on a decline, to 255,421 futures and options in the week through April 25, the CFTC data show. That's down almost 40 percent from a record in February. Longs fell 13 percent, while shorts jumped 26 percent.

The net-long position in Brent oil also decreased. Speculators' wagers on the grade, the global benchmark traded in London, fell by 69,167 contracts to 358,266, the lowest level since November, data from ICE Futures Europe showed.

WTI slid 5.4 percent during the report week, falling below two technical barriers -- the 50-day and 100-day moving averages. Futures declined 1 percent to settle at $48.84 a barrel in New York on Monday.

The drop below $50 is “enough for the casual technician to take some money off the table if you're long,” Bill O'Grady, chief market strategist at Confluence Investment Management in St. Louis, said by telephone.

Investors had been expecting prices to rise to $55 or $60 a barrel in light of the OPEC deal and prices never reached that level, Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors LLC, said by telephone. “You started the year with longs. They're giving up on the trade to a certain point.”

To contact the reporter on this story: Jessica Summers in New York at jsummers24@bloomberg.net.

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Reg Gale at rgale5@bloomberg.net, Carlos Caminada, Millie Munshi