Hedge funds and other money managers have raised their bullish bets on U.S. crude prices to the highest level since the slump started in the summer of 2014.
Saudi Arabia and other OPEC members have successfully pushed oil prices back above $50 by squeezing bearish fund managers (“Saudi Arabia squeezes hedge funds with bearish bets on oil”, Reuters, Oct 10).
Hedge funds raised their net long position in the two main futures and options contracts linked to U.S. crude WTI by 39 million barrels to 292 million barrels in the week to Oct 11.
The combined position was the highest since July 2014, when WTI prices were still trading above $100 per barrel and the long slide in prices was just beginning.
Hedge funds have raised their combined position by 155 million barrels since the middle of September and by 212 million barrels since early August, according to data from the U.S. Commodity Futures Trading Commission.
Most of the adjustment has come from the short side of the market as hedge funds have covered short positions established earlier in the summer.
Hedge funds have cut short positions in WTI-linked futures and options from a peak of 249 million barrels in early August to just 102 million barrels, a reduction of 146 million.
Over the same period, hedge fund long positions have risen from 329 million barrels to 394 million, an increase of just 65 million.
Hedge funds have accumulated and liquidated short positions in four distinct cycles since the start of 2015.
The accumulation and liquidation of hedge fund short positions has corresponded closely with the rise and fall in oil prices.
The fourth and most recent cycle of short-selling began in early June when WTI prices were just over $50 per barrel and the number of short positions in WTI was equivalent to around 78 million barrels.
The cycle peaked at early August, when the number of short positions had risen to 220 million barrels, and WTI prices hit a low around $39-42.
Since then short positions have been reduced, somewhat unsteadily, and by Oct 11 the number of shorts had returned to 71 million barrels and prices were back just above $50.
The reduction in short positions has provided crucial support to prices over the last 10 weeks and explains why OPEC’s relatively weak output agreement reached in late September had such a big impact on prices.
ut the short covering process has now run its course, with relatively few more short positions to cover, and is likely to provide less support to prices going forward.
U.S. crude oil prices peaked at $51.60 on Oct 10 and have since struggled to rise further, which is consistent with the short-covering rally being largely over.
The balance of price risks has shifted significantly, at least as far as the positioning of hedge funds is concerned.
In August and September, the balance of risks was clearly tilted to the upside, with so many short positions needing to be covered and a relatively modest number of long positions.
Now the position is reversed. There are few short positions while the number of hedge fund longs is at the highest level since 2014, which tilts the balance of risks to the downside.
Pushing oil prices back to $60 is likely to prove hard unless Saudi Arabia and OPEC can show they are serious about making real production cuts that remove physical barrels from the market.