Oil surges nearly 35% in 2019 and hedge funds are betting on more gains next year

Key Points
  • West Texas Intermediate crude is pacing to end the quarter with a 14% gain, and hedge funds are taking note.
  • "Hedge funds have swung from extreme bearishness to extreme bullishness," Ned Davis Research energy strategist Warren Pies said Monday. The firm remains positive on oil, but noted that the "bull case is weakening."
  • RBC's Helima Croft said that now that macro headwinds such as the US-China trade war have subsided, people can see "light at the end of the tunnel" and oil can accelerate gains going forward.

West Texas Intermediate crude futures have rallied 13% this quarter and nearly 35% this year, posting oil's best annual performance since 2016. And now big investors are starting to get on board with the trade.

"Hedge funds have swung from extreme bearishness to extreme bullishness," Ned Davis Research energy strategist Warren Pies said in a note Monday. "In two months, hedge fund short positioning in crude oil futures has gone from above 35% to below 9%."

That said, it is important to note that much of the current quarter's gain is retracing a decline that started at the end of September and stretched into the current quarter. Brent crude futures climbed nearly 23% this year.

One of the factors boosting prices is the deeper-than-expected cut that OPEC and its allies announced on Dec. 5. The cartel said it was cutting production by an additional 500,000 barrels per day through the first quarter of 2020, bringing the total production cut to 1.7 million barrels per day.

WTI on Tuesday was trading at $61.16, down 52 cents on the day.

Following the larger-than-expected OPEC cut, Goldman Sachs raised its 2020 Brent crude and West Texas Intermediate crude forecast by $3 to $63 and $58.50 per barrel respectively, due to "more favorable inventories" following the cut.

Pies said that he heading into the end of the year he remains "officially bullish on crude oil," especially since the long and short term trends — key technical indicators — are rising. That said, he noted that the bull case is weakening and that investors should keep an eye on inventory reports going forward.

RBC's Helima Croft said that an improving macro outlook should continue to boost oil prices going forward. "The fact that the trade war is not dominating the headlines, the fact that people see light at the end of the tunnel, that's a really important story for oil right now because the macro story was really holding oil back," she said.

She also noted that Chinese demand is holding up better than expected, which is a "really positive catalyst for oil," and that OPEC's larger-than-expected cuts should continue to support prices.

How the US energy market has changed in the last decade

For 2020, Francisco Blanch, head of commodities and derivatives research at Bank of America, sees WTI averaging $54 per barrel, with Brent at $60. In his 2020 energy outlook Blanch said that a "more accommodative Fed, rising US inflation, improving global growth conditions...and low oil inventories" should support prices. He forecasts global demand to reach 1.08 million barrels per day — up from 0.93 million barrels per day this year — primarily driven by non-OECD nations.

- CNBC's Patti Domm contributed to this report.