Hedge funds continue to turn more cautious on the outlook for oil prices, but the liquidation of former bullish positions is very gradual, suggesting most see price risks close to balance.
Hedge funds and other money managers cut their net long position in the six most important futures and options contracts linked to petroleum prices by 23 million barrels in the week to March 13.
Funds have trimmed their net long position in six of the last seven weeks by a total of 268 million barrels, according to position records published by regulators and exchanges.
But managers still hold a net long position across the petroleum complex that is 906 million barrels higher than at the end of June 2017.
The entire adjustment has come from the bullish side of the market, with long positions cut by 277 million barrels since Jan. 23. Bearish short positions have actually declined by 10 million barrels in the same period.
Long positions in Brent, NYMEX and ICE WTI, U.S. gasoline, U.S. heating oil and European gasoil total 1,347 million barrels compared with just 131 million barrels of short positions.
As a result, long positions outnumber short ones by a ratio of more than 10:1, not far below the record ratio of 12:1 set almost two months ago.
The liquidation of bullish positions shows no sign of accelerating. There are no signs of significant fresh short selling. And the hedge fund positioning remains exceptionally lopsided.
Fund managers have become slightly more cautious about the prospect of a further increase in oil prices following the strong rally between June and January, but few are willing to bet prices will drop back much.
The fund community still expects oil prices to rise further, but it has inevitably and logically become slightly less bullish given prices have risen by more than $20 (almost 50 percent) already.
Fund positioning in the oil market continues to look stretched and remains a source of considerable downside price risk if and when portfolio managers try to realise more of their profits.
But the fact liquidation has so far been gradual, there has been no rush for the exit, and prices have remained steady, have given bullish managers more resilience and confidence.
Prices appear capped on the upside by the threat of increasing output from U.S. shale producers, but supported from below by strong consumption growth and OPEC’s determination to continue cutting inventories.
For now, traders seem comfortable with prices moving in a relatively narrow range around $65 per barrel for Brent, which is contributing to the fall in volatility to its lowest level since 2012-2014.