Hedge funds sour on crude oil

Focus turned to US rigs, net long positions cut

Hedge fund managers have become very bearish about the outlook for oil prices as production from countries outside the OPEC grows and threatens to undermine the effectiveness of OPEC’s output controls.

Hedge funds and other money managers cut their combined net long position in the three major futures and options contracts linked to Brent and WTI by 51 million barrels in the week of June 13.

Fund managers cut their net long position for the second week running by a cumulative total of 91 million barrels, according to data published by regulators and exchanges.

Portfolio managers also cut their net position in gasoline by 13 million barrels and heating oil by 19 million barrels last week.

Hedge funds have discounted the fact that oil prices are already lower than $ 50 per barrel and reassurances from OPEC ministers that global oil stocks will draw in the second half of the year.

Instead, they have focused on the continued rise in the number of rigs drilling for oil in the US and signs gasoline and diesel demand may not be growing fast enough to absorb the record fuel being produced by US refineries.

The US Energy Information Administration predicts global oil stocks will draw down in the third quarter of 2017 as a result of OPEC’s output cuts.

But global stocks are expected to rise again through 2018 as OPEC compliance deteriorates and supply from non- OPEC sources increases.

Bearish sentiment among oil traders has triggered a wave of short selling, with hedge funds adding 45 million barrels of extra short positions in crude, as well as 15 million in gasoline and 16 million in heating oil.