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(Bloomberg) — Hedge funds increased bets on rising oil prices to an eight-month high on signs U.S. production is slowing.
Speculators boosted their net-long position in West Texas Intermediate crude by 9 percent in the seven days ended April 14 to the highest since August, U.S. Commodity Futures Trading Commission data show. Shorts, or bets on falling prices, tumbled to the lowest since February.

WTI has rebounded by 28 percent from a six-year low in March, boosting speculation that crude hit bottom. U.S. drillers are using the fewest rigs since 2010 after companies cut back on exploration amid the biggest plunge in prices since 2008. The government projects that shale oil output will decline in May and total production will start to drop in June. “The shorts are throwing in the towel,” Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said by phone on April 17. “A lot of the people that were betting on a price collapse are changing their mind based on the fact that we are seeing U.S. production start to fall.”

WTI futures slid 69 cents to $53.29 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. Prices settled at $55.74 on April 17, capping the biggest weekly gain in four years. Shale production from fields including the Permian and Eagle Ford in Texas and Bakken in North Dakota will decline by 57,000 barrels a day next month, the Energy Information Administration said on April 13. That’s the first time the agency projected a drop in reports going back to 2013. “There is certainly a perception that U.S. production is beginning to wane,” Michael Hiley, head of over-the-counter energy trading at LPS Partners Inc. in New York, said by phone on April 16. “It’s easy to take the data and run a bullish scenario.”

Output Dip

The EIA forecast that output will dip from June through September, before recovering. The International Energy Agency projected that U.S. production of 12.6 million barrels a day in the first half of 2015 will slide to 12.5 million by the fourth quarter. The IEA figure includes crude, condensate and natural gas liquids. Production slipped to 9.38 million barrels a day in the week ended April 10, preliminary EIA data show. U.S. drillers idled oil rigs for the 19th straight week in the seven days ended April 17 to bring the total count down to 734, the lowest level since November 2010, according to Baker Hughes Inc.
Inventories are still at the highest level since 1930, climbing 1.29 million barrels to 483.7 million barrels on April 10. The increase was the smallest since a decline in January. U.S. refineries used 16.2 million barrels a day of crude in the week ended April 10, the highest seasonal level in EIA weekly data going back to 1989. Plants have increased crude demand by an average 601,000 barrels a day in April and May over the past five years.

Refinery Demand

“Refinery runs will go further up as they end maintenance,” James Williams, an economist at WTRG Economics, an energy-research firm in London, Arkansas, said by phone April 17. “It’s now becoming obvious that U.S. production is going to be significantly lower by the end of year.” Net-long positions in WTI rose by 19,185 to 231,556 futures and options in the week ended April 14, the most since Aug. 5. Short bets declined 13 percent to 109,973, while long positions rose 0.9 percent to 341,529. In other markets, bullish bets on gasoline dropped 36 percent to 16,380. Futures fell 1.3 percent to $1.836 a gallon on Nymex in the reporting period. The U.S. average retail price of regular gasoline gained 2.1 cents to $2.429 a gallon on April 16, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group. Bearish wagers on U.S. ultra low sulfur diesel decreased 28 percent to 22,958 contracts. The fuel rose 1 percent to $1.8017 a gallon.

Natural Gas

Net-short wagers on U.S. natural gas jumped 34 percent to a record 98,008. The measure includes an index of four contracts adjusted to futures equivalents. Nymex natural gas dropped 5.6 percent to $2.53 per million British thermal units during the report week. As U.S. producers pull back, other countries are increasing output. Saudi Arabia boosted production by 658,800 barrels a day to 10.294 million in March, according to data the country communicated to the Organization of Petroleum Exporting Countries’ secretariat in Vienna. OPEC’s collective output increased to 30.79 million, exceeding the group’s 30-million target. “The talk lately is about how shale oil is peaking and that’s contributing to the bullish sentiment,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone on April 17. “But the reality is that there’s still a lot of oil out there, and we had a huge increase in OPEC production.”

To contact the reporter on this story: Moming Zhou in New York at mzhou29@bloomberg.net To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net; Dan Stets at dstets@bloomberg.net Bill Banker