Hedge Funds Increase Bearish Bets as US Crude Prices Plummet

Oil prices plummet to nearly two-month lows due to rising supply levels and weakening demand. US crude inventories surge by 4.91 million barrels, defying expectations of a 1.1 million barrel decrease.

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Nitish Verma
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Hedge Funds Increase Bearish Bets as US Crude Prices Plummet

Hedge Funds Increase Bearish Bets as US Crude Prices Plummet

Oil prices have plunged to their lowest levels in nearly two months, with US West Texas Intermediate (WTI) and Brent crude taking a significant hit. The decline stems from a complex interplay of rising supply levels, weakening demand, and concerning economic indicators, pointing to a potentially prolonged bearish phase in the oil markets.

Why this matters: The drop in oil prices has significant implications for the global economy, as it can influence inflation rates, currency values, and overall economic stability. Furthermore, a prolonged bearish phase in the oil markets could have far-reaching consequences for oil-producing countries and industries reliant on oil.

According to the American Petroleum Institute (API), US crude inventories have surged by 4.91 million barrels, defying expectations of a 1.1 million barrel decrease. This unexpected buildup in stockpiles coincides with a rise in US crude production, which reached 13.15 million barrels per day in February, up from 12.58 million barrels in January. The Federal Reserve's decision to hold interest rates steady has also contributed to persistent worries about inflation and economic stability, with high rates bolstering the dollar and making oil more expensive for holders of other currencies, potentially curbing demand.

Technical analysis reveals both WTI and Brent trading below their 200-day moving averages, suggesting investors anticipate further declines. The weakening demand for oil is underscored by reduced diesel consumption in key markets like the US and Europe. The drop in US diesel demand, along with inventory builds in Europe's major hubs, points to a slowdown in industrial and transport activities likely tied to economic uncertainties.

OPEC has signaled the possibility of extending output cuts to stabilize or boost oil prices by restricting available supply. There is also speculation about the US government potentially purchasing oil to replenish strategic reserves if prices fall below $79, which could temporarily support prices by increasing demand for excess stocks.

Weekly technical analysis indicates that while the main trend is up, momentum has shifted to the downside following the closing price reversal in the week ending April 12. The chart pattern suggests a correction to alleviate upside pressure, which typically concludes after a 50 to 61.8 percent retracement of the last rally. This puts the $76.91 to $74.49 range on the radar, while a trade through $87.13 would signal a resumption of the uptrend.

With the current trends of increasing supplies and softening demand supported by cautious economic policies, the short-term forecast for oil prices remains bearish. Hedge funds are ramping up their bearish bets on US crude, anticipating further price declines. The total number of active drilling rigs for oil and gas in the United States fell by 8 to 605 this week, with oil rigs down by 7 and gas rigs down by 3, contributing to the decrease in oil prices.

Key Takeaways

  • Oil prices plummet to 2-month lows due to rising supply and weakening demand.
  • US crude inventories surge by 4.91 million barrels, defying expectations.
  • Federal Reserve's decision to hold interest rates steady contributes to economic uncertainty.
  • OPEC may extend output cuts to stabilize prices, while US gov't may buy oil for strategic reserves.
  • Short-term forecast for oil prices remains bearish due to supply-demand imbalance.