From The Wall Street Journal

Volatility is picking up in oil markets following a powerful 2019 rally, prompting a retreat among portfolio managers into less-risky investments in a sector that many investors still view as hot.

U.S. crude tumbled nearly 3% Friday, its largest one-day drop of the year, after earlier in the week hitting its highest level in nearly six months. The slide followed comments from President Trump, who said he encouraged the Organization of the Petroleum Exporting Countries to increase supply and keep prices low.

Prices surged earlier in the week after the Trump administration surprised some market participants by ending waivers on Iran sanctions that allowed some buyers to continue purchases from the Islamic Republic. Last week marked the first time in nearly two months that oil logged multiple moves of at least 2.5% in either direction.

The moves are putting investors on edge because of the narrow supply-demand balance heading into the U.S. summer driving season. The decision to end the sanctions waivers threatens to remove even more oil from global markets at a time when U.S. sanctions against Venezuela and an ongoing conflict in Libya have already resulted in lower supply from those countries.

Even with the U.S. producing record amounts of oil, many investors remain unsure how quickly OPEC and its allies would fill any impending production gaps, opening the door to large price swings in either direction.

“That timing difference could cause a short-term spike in oil prices at a time when you’re going to start seeing summer vacations and the driving season begin,” said Rob Thummel, who manages energy assets for Tortoise, an asset manager based in Leawood, Kan.

At the same time, U.S. crude is still above $63 a barrel and is heading for its best performance in the first four months of a year since 1999, according to Dow Jones Market Data. Prices are up 39% for the year, after falling to the low $40s in a sharp 2018 rout. Some investors believe the large gains leave the crude price vulnerable to a sudden turn in sentiment, which happened in the fourth quarter of last year.

In response to the uncertainty, some investors are increasing bets on energy investments they consider more stable than crude futures, such as shares of oil producers or equipment providers. Others are trimming positions in the sector broadly with the belief OPEC will lift supply.

Sentiment for now remains positive. The ratio of bullish bets to bearish bets on U.S. crude-oil futures by hedge funds and other speculative investors rose for a ninth consecutive week to its highest level in seven months during the week ended April 23, Commodity Futures Trading Commission data show.

But bets on higher prices are still well below July’s peaks, a sign that many traders remain leery of a replay.

“It’s been a massive roller coaster over the last couple of months,” said Tyler Ellegard, an investment analyst at Gradient Investments, which recently increased positions in U.S. exploration and production companies Diamondback Energy Inc. and Concho Resources Inc.

A possible bidding war for Anadarko Petroleum Corp. that analysts say could trigger other energy deals has added to the mixed momentum signals, investors say, with perceived buyout candidates potentially rallying and buyers likely being hit for offering high prices. Occidental Petroleum Corp. offered to buy Anadarko for $38 billion Wednesday, after the company previously agreed to be purchased by Chevron Corp. for roughly $33 billion.

Meanwhile, investors are trying to assess whether OPEC and its partners will lift output to account for the latest shift in U.S. foreign policy. Goldman Sachs analysts estimate as much as 1.3 million barrels a day of Iranian exports could be lost and that Saudi Arabia has 1.24 million barrels a day of production it can quickly turn on in an emergency. Russia, the United Arab Emirates and Kuwait together have another 590,000 barrels a day of immediate spare capacity, the analysts estimate.

“Everyone is recalibrating to the new market dynamics,” said Rebecca Babin, a senior energy trader for CIBC Private Wealth Management. “The policy and political side of the equation has ratcheted up in complexity.”

Like stocks and other risk assets, oil has also benefited from the Federal Reserve’s pause in interest-rate increases and optimism about a U.S.-China trade agreement. Those developments have eased fears of a sharp slowdown in global economic growth and lower fuel demand, but also potentially tied oil more to the outcome of ongoing trade talks set to continue this week, investors say.

Even if the weekslong rally does continue, some analysts say it would have an end date should Brent crude, the global price benchmark, rise another 11% to $80 a barrel. Analysts and OPEC nations say that closely watched level starts to crimp global economic growth by pushing up gasoline and fuel costs.

“Once we get into the $80 range, you’re going to see Trump complaining,” said David Yepez, a portfolio manager at Exencial Wealth Advisors, which is taking profits on some positions in energy stocks it bolstered late last year. “It feels like there’s going to be a cap.”

Tags:

Legal Notice