Oil is back in with investors as hedge funds and big money flock back to the barrels. The weekly commitment of trader (COT) reported that crude futures traded by large speculators and hedge funds totaled a net position of 492,692 contracts in the data reported through January 31st, a gain of 10,169 contracts from the previous week. In fact, this is the third week in a row that big money has moved into crude oil, raising their interest by almost 12% in recent weeks even as U.S. oil rig counts and U.S. supply increases. The reason is that the big money is looking beyond the near-term glut and focused on a large OPEC production cut and rising global demand and increasing tension with Iran.

Even as the U.S. oil rig count rose by 17 to 583 rigs this week and is the highest since October of 2015, the big money knows it will take time for U.S. producers to erase the cuts that OPEC and non-OPEC players like Russia have already made. Rigs in the Permian basin are hot but in other formations we may have to see a higher price for oil to reignite the investment appetite.

Iran is launching another missile. President Trump called Iran a terrorist state, a charge that Russian President Vladimir Putin strongly disagrees with. Still the U.S. last week imposed sanctions on 13 individuals and 12 entities related to Iran's missile program. On Saturday Iran held a military exercise to test its missile and its radar system. Iran is also threatening Israel saying that if the U.S. attacks Iran, they will fire a missile at Israel. There are I24 reports that a senior Iranian official on Saturday warned that Tehran would immediately strike Israel if the United States "makes a mistake" as a war of words continued to escalate in the wake of Iran's ballistic missile testing and Washington's announcement of new sanctions in response. Mojtaba Zonour, a senior member of Iran's National Security and Foreign Policy Commission and a former Revolutionary Guards official, was quoted in Fars news agency as saying that, "only 7 minutes is needed for the Iranian missile to hit Tel Aviv.”

We continue to like the long side of oil on breaks. As we have said before, not only will OPEC comply with production cuts you will see demand exceed expectations both domestically and internationally. This is not you daddy’s cartel. Shale oil can’t replace OPEC cuts and it can’t replace projects that have been canceled that have a much slower production decline rate. The big money is looking beyond the current glut and focusing on a global market that is going to be tightening very quickly.

Gas prices have been falling but some are worried that a Donald Trump border tax would add to the cost of a gallon. If U.S. refiners, who like imported heavy oil, must pay a 20% tax then that tax would be passed on to consumers. This comes as ethanol production is running at record highs. Last week ethanol production averaged 1.061 million barrels per day (b/d) or 44.56 million gallons daily. That is up 10,000 b/d from the week before and a new record. It is the 14th week in a row with production above 1 million b/d. 

Brent crude prices are widening their premium over U.S. as well as Opec cuts and reduced North Sea production is widening the spread. Plus, oil from Nigeria and Libya have not proven to be reliable.

Natural gas is still getting hammered on warm weather. Forget that we did not add any gas rigs last week and production will continue to decline if prices do not start to rise. In the short term it is all about weather, in the long term it is a growing structural shortage.