Oil Prices: Hedge Funds Make Massive Bet on Oil Price Rally

By Markets Fool.com

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Source:Flickr user Ian Burt.

News that world powers were closing in on a nuclear deal with Iran sent oil prices down last week. The deal has traders worried that the global oil glut could increase once the shackles are removed from the country's petroleum exports.

However, even as some traders fret over Iran, others are betting big that oil prices are poised to bounce.Speculators boosted their net-long position on U.S. oil benchmark West Texas Intermediate by 21% over the last week of March, according to new data from the U.S. Commodity Futures Trading Commission. That was the biggest bullish move on the oil market in four years as traders bet big that prices are about to rally.

Lots of noise
There has been a fierce tug-of-war in the market since the start of the year as oil traders look for a sign that oil prices have bottomed. Bulls argue that the rapiddecline in the U.S. rig countwill keep a lid on supplies and could lead todeclining oil production by the end of this year. They also point out that demand for gasoline is rising -- up 2% from this time last year -- whilegasoline inventories unexpectedly drew down last week.

On the other side of the debate, bearish traders think oil prices are due for another leg down. These traders fret about the Iranian nuclear deal adding to supply. They're also quick to point out that the world is running out of places to put its overabundance of supply as oil storage facilities quickly fill to the brim.

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This debate has sent oil prices on a wild ride in recent weeks. That ride could continue until there is a stronger consensus that the glut of oil is being worked off.

Not buying the bearish worries
A growing number of oil traders, however, simply don't buy the bearish argument. That's abundantly clear from the massive increase in net-long bets in WTI during the last week in March. Not only did traders increase their bullish bets to the greatest degree since March 2011, but short positions by bearish traders also dropped the most in three months. Clearly, oil traders see much more upside than downside.

One reason for this is that many traders simply don't believe an Iran deal will add much, if any, oil to the market in the short term. In fact, many don't see Iranian oil output returning to 1 million barrels a day for at least another year. That's because the country has underinvested in its oil infrastructure and will need time to boost output. Also, the U.S. rig count fell again last week, marking the 17th consecutive week of declines. This suggests domestic oil production growth is on pace to trail off later this year. These two factors suggest oil supply growth will be tepid at best.

Meanwhile, traders are growing less worried about the storage situation because U.S. refineries are poised to produce a record amount of gasoline this year. Refining margins are at a two-year high, which is a huge incentive to make more gasoline and other refined petroleum products. Furthermore, refiners have invested a significant amount of money over the past couple of years to increase their capacity to refine the additional oil supplies brought on line by shale producers. Just since last summer, they have added 100,000 barrels of new refining capacity, which will eat into the glut of oil in storage.

Investor takeaway
Oil traders see a lot of potential for a rally in the price of oil, which is why they boosted bullish positions by the greatest amount in four years. These traders see the combination of muted supplies and better-than-expected demand as a bullish sign for oil prices. That said, other traders see just as many bearish signs, so the market isn't out of the woods just yet. Nonetheless, market sentiment does appear to be swaying toward the bulls at the moment.

The article Oil Prices: Hedge Funds Make Massive Bet on Oil Price Rally originally appeared on Fool.com.

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