Crude markets are taking oil optimists by surprise yet again.

Hedge funds boosted bets on a rally just before West Texas Intermediate prices tanked from a report showing surging American stockpiles. Wagers rose 7.3% to the highest since April in the week through June 6, U.S. Commodity Futures Trading Commission data show. The next day, futures fell the most since March and are lingering near this year’s lows.

“The last thing the market needed to see was that inventories in the U.S. went up, when they are supposed to be going down seasonally,” Tamar Essner, an energy analyst at Nasdaq Inc. in New York, said by telephone. The report “shows that there are some bulls that are starting to get more interested in the market, but I imagine that when we get the CFTC data next week to reflect the Wednesday selloff, we’ll see a bit of a reversal.”

All eyes turned to what’s happening in the U.S. market after OPEC’s deal to limit output failed to impress investors as it didn’t include deeper cuts, additional allied countries or an exit plan. The report that American supplies of crude and products jumped the most since 2008 came as the last nail in the coffin. Futures — after reaching $52/bbl in the run-up to the group’s meeting in Vienna last month — plunged to near $45 last week and traded around $46 on Monday.

Blame it largely on shale. As explorers in Texas lead the longest U.S. drilling revival on record, confidence in OPEC’s strategy wanes. Igor Sechin, chief executive officer of Russian giant producer Rosneft Oil, is among those who doubt the deal to reduce supplies will stabilize the market over the long term as U.S. shale fills the shortfall.

Bearish Outlook

Not only did supplies in the U.S. surge in last week’s EIA report, but the agency also forecasts U.S. crude output will average more than 10 MMbpd next year for the first time. Not even tension in the Middle East was able to get oil to pick up steam last week after the shock waves sent by the EIA report.

Hedge funds increased their WTI net-long position, or the difference between bets on a price increase and wagers on a drop, by 15,037 to 221,140 futures and options, the CFTC data show. Longs rose by 2.5%, while shorts decreased by 7.4%.

Money managers also boosted their net-long position on the benchmark U.S. gasoline contract, by 6.5%. Wagers on diesel flipped to a net-short position.

U.S. total crude and product stockpiles increased by 15.5 MMbbl to 1.35 billion in the week ended June 2, according to EIA data. Nationwide crude imports climbed by 356,000 bpd and exports dropped by 746,000 bpd, the largest decline on record.

“Usually, this time of a year, you see draws. It caught a lot of people off guard,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said by telephone. “It’s lower for longer, that’s what we feel.”

Growing Doubts

Before oil took a tumble, some banks were already having doubts on the market. Goldman Sachs Group’s equities team slashed its WTI and Brent price forecasts for this year and Citigroup Inc. said OPEC needs to give more clarity on the group’s process for targeting stockpiles as it cuts output to ease a global glut.

“My view is one that is cautious on the oil market,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management in Seattle, which oversees $142 billion of assets. “Prices are low and probably headed lower because fundamentals aren’t supporting you, and at some point, as we get back into the lower part of the 40’s, we’ll have to see if OPEC does defend again.”

Source: www.worldoil.com