Oil futures suggest bullish funds' big bet on price may pay off

Fri Feb 24, 2017 4:37am EST
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By Amanda Cooper

LONDON (Reuters) - Oil investors have placed the biggest bet in history that prices will rise, as the world's largest exporters cut output to reduce a glut in supply, and the futures market is suggesting for the first time in a year that they could be onto a winner.

Fund managers now hold more Brent oil futures and options contracts than at any time on record, equivalent to some 480 million barrels of oil and nearly double the amount held just two months ago.

The pace of the increase in the benchmark April Brent futures contract LCOc1 price in that time hasn't been as intense. The price is some 15 percent higher, around $57 a barrel, but for the first time since April last year this front-month contract is on the verge of trading above the price of longer-dated futures.

This phenomenon, known as backwardation, only tends to take place when investors and traders expect prompt demand for oil to improve to the point where it overtakes supply.

Total world demand averaged 97.3 million barrels per day in the fourth quarter of 2016, while supply was running at 97.9 million bpd, according to the International Energy Agency (IEA).

"We estimate that the physical oil market is now in deficit, and that oil inventory levels should be falling," Investec Asset Management portfolio manager Tom Nelson, who helps manage a part of the company's $114 billion in assets.

"With approximately $1 trillion of lost investment through the recent downward trend and more constrained access to capital, we expect oil markets to remain structurally tighter for several years, suggesting a more positive period for oil prices," he said.

For almost three years the world has been awash with billions of barrels of unwanted oil, after the explosion in U.S. shale production and OPEC's strategy of producing as much crude as possible to drive out less profitable rivals.   Continued...

Fuel pump nozzles are pictured at a Helios petrol station in Almaty, Kazakhstan, June 10, 2016.  REUTERS/Shamil Zhumatov