By Barani Krishnan
Investing.com - Hedge funds in oil, which provide much of the market's daily liquidity, seem to be at a crossroads.
Aggressive OPEC cuts, virtually-frozen Venezuelan oil exports, U.S. crude stockpile slumps and friendly interest rates in the United States are stoking a herd-like mentality to chase prices to new 2019 highs after West Texas Intermediate futures breached the $60 per barrel mark on Wednesday for the first time since November.
But a still-wobbly Chinese and global economy and the possibility of a new wall of U.S. supply from shale operators reveling in profits to be made at current prices are also fostering enough negativity to temper funds from rushing into new long positions. Big Oil is already muscling small drillers from U.S. shale patches for a share of the action there, with Exxon Mobil (NYSE:XOM) saying it can get a barrel from Permian, the most prolific patch, for as low as $35 -- a 70% profit at existing prices.
The push-and-pull forces in U.S. crude were evident on Thursday as the market traded in a tight 70-cent band, barely moving much in each direction from the Singapore session right through to midday in New York.
WTI settled down 25 cents, or 0.4%, at $59.98.
The U.S. crude benchmark gained 1.4% in the previous session, cracking $60 resistance, after the Energy Information Administration announced a surprise crude inventory drawdown of nearly 10 million barrels last week versus expectations for a 300,000-barrel build.
Brent, the U.K.-traded global oil benchmark, was down 83 cents, or 1.2%, at $67.67 by 3:45 PM ET (19:45 GMT). After taking out their immediate target for WTI, expectations are for long-oil funds and other speculators to attempt $70 Brent next, though the many variables in the market could delay that.
Notwithstanding Thursday's slide, crude prices are up as much as 5% for March and 30% for the year.
"The oil markets remind me of U.S. natural gas," Scott Shelton, crude broker at ICAP (LON:NXGN) in Durham, N.C., said, referring to another market expected to be stuck with range-bound moves over the next couple of months as spring brings the transition between heating and cooling demand.
While oil's prompt fundamentals were solid, along with strengthening cash markets for Brent and good refining margins, Shelton said, "the back end of the market(s) are acting like a brick .... as the only rally is a curve rally".
"There are no investors buying forward crude and producers are hedging, which means the market will ... struggle to find a trend, unless cash becomes 'unhinged' or ballistic. I continue to think the market will continue to have pullbacks and shakeouts, which will make being long very difficult," he added.
But that was as far as the negativity went. On the positive side, he admitted "that being bearish (at) even the back-end of WTI has felt like I have been swimming upstream lately".
Oil traders are also mindful that renewal of U.S. waivers for Iranian crude purchases were coming up in May and while the Trump administration keeps talking about its aim of bringing Tehran's oil exports to zero, it could grant generous sanction waivers again, ike in November, adding supply that could offset OPEC cuts.
"There are two competing arguments for the future trajectory of oil prices," said Ellen Wald, columnist for Investing.com. "One says that prices are heading steadily upwards and another says that prices are being pulled downward."