Is oil a good bet for 2018? Hedge funds seem to think so according to a recent report by Bloomberg. They are betting heavily on a continued uptrend in oil prices. Bloomberg reports that hedge funds’ net-long positions – the difference between bets on a price increase and those on a drop – for the West Texas Intermediate (WTI) were up by 2.9% for the week ended January 23 to 496,111 futures and options, the highest since 2006. The Brent net-long position among hedge funds rose by 2.4% to 584,707: long positions were up by 1% while short positions fell by 12%. “The long oil trade continues to be the place to be,” commented Rob Thummel, managing director at Tortoise Capital Advisors LLC.
Brent oil futures are currently up by 3.4% since the start of 2018, while WTI is up by approximately 8%. Crude prices have been in an uptrend for the past 5 months, helped by OPEC’s remarkable discipline in maintaining their schedule of output cuts, with Russia and Saudi Arabia having made great efforts to wipe out the supply glut. Recent weakness of the US dollar has also helped prices rise further. These developments should have a major impact on the bottom line of oil companies.
After oil prices crashed in 2014, most oil companies have embarked on quests to cut down costs and improve efficiency so that they could operate profitably at lower oil prices. They got rid of low quality or high costs assets in order to focus more on the most productive and top-tier assets. A large number of oil companies have also put in a lot of effort to reduce debt and solidify their balance sheet. As a result, these companies are sitting on great piles of cash ready to be deployed at the right time: either to increase production or improve efficiency of existing wells, or to return money to shareholders via dividends or share buybacks. Most companies have based their turnaround plans on the assumption that oil prices would fluctuate around the $50 level for the foreseeable future. However, with oil price rising, it is highly probable that companies will surpass their forward guidance and would provide some pleasant earnings surprises.
With so many companies to choose from and so many ways to screen them, some investors might find it difficult to make a decision. Insider Monkey likes to look at companies billionaire fund managers are betting on. After all, there is a very simple reason they’ve become billionaires – their ability to pick stocks.