AP
Recession Talk Worries Oil Investors
Tuesday January 22, 5:44 pm ET
By Matt Chambers
Some Funds Exit Crude Oil Futures Market on Fears About a U.S. Recession


NEW YORK (AP) -- A search for low-risk investments amid a U.S. economic slowdown has prompted the withdrawal of nearly $10 billion worth of crude oil futures bets by hedge funds and other large speculators in the past two weeks, according to major energy trader Goldman Sachs.

The big exit comes as oil prices have slumped more than 10 percent since reaching an intraday record of $100.09 a barrel on Jan. 3. The drop, which has come on speculation that a U.S. slowdown would make a big dent in global crude oil demand, could be exacerbated if the funds, which still have a large net amount of open bets on gains in crude prices, pull more money out.

"Heightened concerns over the economic environment, which have prompted a sharp de-risking across all assets since the beginning of the year, finally spread to oil and commodities last week," Goldman Sachs analysts led by Jeffrey Currie in London, said in a research note. "We believe in the past two weeks funds have liquidated nearly 80 to 100 million barrels" of crude oil futures bets on a gain in prices.

With New York Mercantile Exchange crude oil futures trading mostly between $90 and $95 a barrel for the past two weeks, that would put the amount liquidated so far at up to $9.5 billion.

"If all the speculative length (or bets on gains in prices) were liquidated, prices could drop to the low $80s, however, at current inventory levels, a complete liquidation is unlikely," the analysts said. U.S. crude oil stockpiles have fallen for eight of the past nine weeks, according to government data.

Signs of the liquidation in futures were somewhat evident in the most recent data from the U.S. Commodity Futures Trading Commission, which showed that in the week leading up to Jan. 15, large speculators cut their net long position in crude oil on the New York Mercantile Exchange by 10,932 positions to 83,991. The net long position is the difference between the number of long positions, or bets prices will rise, and the number of short positions, or bets on a fall.

The decline was largely driven by traders exiting long positions, rather than building new short positions, a sign that speculators could be leaving the market.

"The CFTC data for last week did show a considerable shift, particularly in gasoline, so there are people, one way or another, that are getting the message," and exiting long positions, said Tim Evans, an analyst at Citigroup in New York. Speculators cut their net long position in Nymex gasoline futures by almost half, the data showed.

The CFTC data doesn't represent total positions in crude oil futures, because it doesn't include ICE Futures trading, but is taken as a good indication of speculators' positions. The next data release, for the week ended Jan. 22, is due Friday.

Evans said it is hard to lump funds into one group when talking about investment strategy, as they have so many investment mechanisms and don't move in a pack.

"If this market is bearish enough to liquidate long positions, it may be bearish enough to warrant a short position -- if you don't like risk, go back to the bond market," he said. "Funds are not a monolithic beast, they don't function on the same model. What positions they will take, or what radical theory they will follow" is hard to predict.

The oil futures market has been a magnet for investors in the past year at a time of considerable turmoil elsewhere, most notably in the credit markets. Much of the investment flows, which helped push oil prices to $100 a barrel, came as funds sought to increase returns from commodity markets to compensate for losses elsewhere. But a gathering consensus around the idea of a recession or marked slowdown in the U.S. economy has raised questions about the ability of crude prices to withstand any drop in demand.

Somewhat backing up the theory that funds are looking at less risky investments, U.S. Treasurys continued to attract more buying. The two-year note's yield, which moves inversely to its price, touched its lowest level since April 2004, while the 10-year yield was at its lowest point since July 2003.

Gold futures, another traditional safe harbor in times of global turmoil, are also attracting more investment as global stock markets and other commodities get hit. CFTC data shows large speculators boosted their net long position in gold futures on the Comex division of Nymex in each of the four weeks leading up to Jan. 15.

While Goldman Sachs is labeling the fund liquidation as a buying opportunity and is staying with its call for prices to average $95 a barrel this year, other analysts believe the large amount of long positions that funds have accumulated could portend further price falls.

"We have had some indications of liquidation in the last report, but the funds are still heavily long in my opinion," said Jim Ritterbusch, president of trading advisory firm Ritterbsuch & Associates in Galena, Ill. "We have a long way before the funds have a more balanced holding in the oil market."

Ritterbusch also said that liquidation doesn't necessarily mean funds are looking for other investments.

"With all the markets that are getting hit, you're likely to see margin-related selling coming into crude" to liquidate holdings to pay margin calls on other investments, he said.