Oil traders for the last two weeks have shrugged off reports that U.S. stockpiles are brimming at their largest levels ever recorded, as the market continues to bet that crude prices will climb higher.
Oil has maintained its buoyancy because the market is betting that cuts by OPEC will largely rebalance the oil market, despite continued production increases from shale formations in the U.S.
A second consecutive massive build in U.S. crude stockpiles on Feb. 15 left the market relatively unimpressed, as it was little changed during the session, as the market awaited further evidence that OPEC cuts were in effect.
As of last week, noncommercial traders had a net long position of 477,000 U.S. crude contracts, just short of the previous week's level that represented a record long position in oil futures, according to data from the U.S. Commodity Futures Trading Commission.
That speculation has helped crude prices remain supported in recent weeks whenever the market has threatened to slip to lower levels, traders said. The two highest-volume trading days of 2017 occurred when U.S. crude rebounded from lows around $51 a barrel (bbl) as buyers came into the market. U.S. oil has not dropped below $50/bbl since early December.
While speculation by hedge funds and other money managers is contributing to this net long position, it may also be driven in part by the start of institutional investors' return to oil markets after an absence during the crude oil rout.
"It seems that a significant amount of the 'net length' likely belongs to passive institutional investors, which are taking a keener look at commodities and energy once again after several years of absence," Energy Aspects wrote in a research note.
So far in February, there has been about $90 million invested in energy-commodities ETPs after outflows in January, per Lipper data. This compares with $455 million in November 2016 and $1.1 billion in January 2016.
The U.S. Oil Fund (USO) exchange-traded fund and ProShares Ultra Bloomberg Crude Oil both had inflows last week, after three weeks of outflows, according to data from Morningstar. Another large exchange-traded product, VelocityShares 3x Long Crude Oil ETN, continues to have outflows.
Year-to-date, USO has had outflows, said fund manager John Love. Since the Nov. 30 OPEC cut announcement, USO's holdings have fallen from 74,501 contracts to 53,840 on Feb. 15, the last date for which data is available.
The fund started the year with about $3.2 billion under management and is now down to $2.8 billion, he said. The pullback indicates that the fund has a smaller percentage of open interest than previously.
USO holds about 2% of open interest in all NYMEX West Texas Intermediate contracts, but the share is smaller if Intercontinental Exchange contracts are also included.