Will oil prices rally in the near future?
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.
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 4.7% increase from Thursday’s close. The number of contracts has jumped about 75% since the start of March, according to data from options-pricing tool QuikStrike through Wednesday.
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.”