Weaker dollar lifts oil prices, but mood remains bearish

Oil prices rebounded from over three-month lows on Tuesday, lifted by a drop in the dollar, but concerns of ongoing oversupply weighed on markets and many traders are raising their bets on further price falls.

International Brent crude oil futures LCOc1 were trading at $44.89 per barrel at 0658 GMT, up 17 cents from their last close. U.S. West Texas Intermediate (WTI) crude CLc1 was at $43.21, up 8 cents per barrel.

Brent hit its lowest level since May the previous day, while WTI hit its lowest level since April.

Traders said the higher prices were partly a correction after the previous day’s sharp falls, and also reflected a 1 percent fall in the dollar against the Japanese yen JPY= ahead of the U.S. Federal Reserve’s two-day policy meeting that begins later on Tuesday.

As oil is traded in dollars, a drop in its value makes fuel imports cheaper for countries using other currencies, potentially spurring demand.

Despite the slightly higher oil prices, analysts said the overall mood in oil markets had turned bearish.

Both in Asia and now also the United States, the two main pillars of global oil consumption, there are signs of stalling demand growth. This has raised concerns that a rebalancing of a market that has been dogged by over two years of oversupply may be further away than many had hoped.

“Ongoing fears of oversupply are encouraging hedge funds to liquidate their recent record bullish position; at the same time, we are also seeing a corresponding increase in speculative short positions,” said Matt Smith of U.S.-based ClipperData in a note.

Hedge funds selling crude futures and options to close out these bullish positions has put downward pressure on oil prices in recent weeks.

Now, the liquidation of old long positions, which profit from rising prices, is being replaced by the establishment of short positions, which make money out of lower prices, as fund managers try to capitalize on the downward cycle in prices.

Hedge funds and other money managers cut their net long position in Brent and WTI futures and options by 31 million barrels to 453 million in the week ending on July 19.

The money managers short positions in WTI rose to 141,237 contracts in the week to July 19, up from 53,377 contracts for the week to May 31.

During the same period, short positions in ICE Brent held by money managers climbed to 78,351 contracts from 33,111.

Source: Reuters