Hedge Funds Betting on a Rally in Oil Prices

02/29/2016 9:35 am EST

Focus: GLOBAL

Michael Berger

President & Founder, Technical420.com

The number of bullish bets on oil have increased as hedge funds see the supply of crude oil tightening and while Michael Berger of Technical420.com feels commodity price volatility should continue to act as a headwind, he still recommends incorporating energy stocks and MLPs—such as these names—into any diversified portfolio.

Days after China’s central bank said that there was no reason for further currency depreciation, the central bank lowered banks’ reserve requirement ratio.

In an effort to protect the country from an economic slowdown, China’s central bank reduced the amount of cash the nation’s lenders must lock away as reserves by 0.5 percentage points.

The People’s Bank of China has been trying to restore stability to the nation’s currency as capital flows out at a record pace. The lower reserve ratio will allow banks to lend more and it will help compensate for the departure of capital.

Hedge Funds Betting on an Oil Price Rebound

The news out of China comes as the number of bullish bets on oil have increased as hedge funds see the supply of crude oil tightening.

According to data from the United States Commodity Futures Trading Commission, the number of net-long positions in West Texas Intermediate futures and options have increased by 14%, the highest level since November 2015.

Oil prices have rallied more than 10% since Saudi Arabia, Russia, Venezuela, and Qatar tentatively agreed on February 16 to cap production at January levels.  The agreement marks the first sign of cooperation between OPEC and non-OPEC members since oil prices began to slide in 2014.

Falling United States Oil Production Attracts Hedge Funds

These reports come as data out of the United States shows a slowdown in oil production. During the week of February 19, the Energy Information Administration said United States oil production decreased to 9.1 million barrels for the week, its lowest level since October.

Baker Hughes, Inc. (BHI) also said the number of United States oil rigs declined to 400 during the last week, the lowest level since December 2009. 

While commodity price volatility should continue to act as a headwind, we recommend incorporating energy stocks and MLPs into any diversified portfolio. Some of the companies that we expect to outperform the market on a longer-term basis are: Concho Resources (CXO), Memorial Resource Development (MRD), Halliburton (HAL), Baker Hughes, Inc. BHI, Occidental Petroleum Corp (OXY), Tesoro Logistics LP (TLLP), and Enterprise Product Partners (EPD).

Michael Berger, Founder and President, Technical420.com

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