Oil Price - April 4

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By Amrith Ramkumar taken from Bloomberg April 4, 2019 8:00 a.m. ET

At the time of this post, WTI was trading at $62.60/bbl

Closely watched indicators in the oil market are boosting confidence that prices can continue to rebound, sparking bullish bets by investors ahead of the summer driving season.

Crude prices are eclipsing levels that they struggled to top in recent months. U.S. oil recently broke through $60 a barrel, and Brent—the global benchmark—is fast approaching $70. Crossing these crucial psychological levels could lure more investors into the market, analysts say.

Then this week, for the first time in 2019, oil prices climbed above their longer-term average. Market technicians typically read this development as a sign of positive momentum. West Texas Intermediate (WTI) futures, the U.S. crude benchmark, closed on Tuesday at $62.58 a barrel, higher than their 200-day moving average of $61.68. Prices are up 38% for the year.

“Sentiment has definitely turned much more positive,” said Andy Lebow, senior partner at Commodity Research Group. Several momentum indicators for oil have “all turned bullish, and that’s probably lent itself to some more buying.”

The rally marks a dramatic turnaround from the end of last year, when oil tumbled to an 18-month low on worries of too much supply and a global economic slowdown. Now, rising prices are reinforcing a more upbeat tone, especially as investors look ahead to summer, when fuel demand tends to rise as the weather warms and drivers hit the road for vacations.

Investors and traders are using options contracts to demonstrate their optimism.

Open interest, or the number of contracts outstanding, for bullish options tied to U.S. crude hitting $65 by May has increased. That marks a 4.1% increase from Wednesday’s close. The number of contracts has jumped about 75% since the start of March, according to data from QuikStrike, an options pricing tool.

Activity in beaten-down energy stocks has also increased. Energy companies in the S&P 500 added 15% in the first quarter, the largest quarterly advance since 2011. On Wednesday, some of the most-actively traded options in the SPDR S&P Oil & Gas Exploration and Production Exchange-Traded Fund were bullish contracts. The wagers were tied to the ETF jumping 33% by July.

In another sign oil may go higher, prices of oil for delivery in May are close to exceeding prices for delivery in future months.

This condition—known as backwardation—incentivizes traders to sell oil right away rather than store it, helping avoid a buildup in supply that weighs on prices. In a backwardated oil market, investors also don’t incur a “roll cost,” the premium to buy next month’s oil futures when the current contracts expires.

The bullish signals have encouraged speculators to build up wagers on a continuing recovery. The ratio of bullish bets to bearish ones by hedge funds and other speculative investors on U.S. crude rose for five straight weeks through March 25, data from the Commodity Futures Trading Commission show.

Global TrendSpeculative investors have also lifted bullish wagers on Brent crude, the global price benchmark.

A similar trend has taken place in futures tied to Brent. Net bets on higher Brent prices climbed to their highest level since October, according to Intercontinental Exchange figures through March 26. Banks recently raised their 2019 price forecasts for Brent in a poll conducted by The Wall Street Journal.

Some say the wave of bullish positioning is putting the market in a vulnerable state. Questions continue to cloud the outlook for oil, such as whether the Organization of the Petroleum Exporting Countries and its allies will extend an agreement to cut production. Some analysts also remain skeptical that U.S. shale producers will stay disciplined in curbing output, if the price rally continues.

Investors world-wide are also waiting to see if the U.S. and China resolve their months-long trade dispute, and whether the Trump administration extends sanctions waivers to buyers of Iranian crude.

U.S. supply is one factor keeping some analysts cautious about the oil-price rebound.U.S. crude-oil production.

Any disappointment in these events could exacerbate a reversal, as speculators liquidate their positions. But Mr. Lebow said there are reasons to think there are buyers currently on the sidelines that could be drawn in. The number of bullish wagers by speculators remains well below last year’s peaks.

“There still could be more bullish appetite to the market going forward,” Mr. Lebow said.