Brent falls on profit-taking after rally

John Kemp is a Reuters market analyst. The views expressed are his own.

Hedge fund managers started to take some profits after the strong rally in crude oil prices, even before details emerged last week of output increases from Saudi Arabia and sanctions waivers by the United States.

Hedge funds and other money managers cut their combined net long position in the six most important petroleum futures and options contracts by 19 million barrels to 1.081 billion barrels in the week to Oct 2.

Portfolio managers cut their net long position in NYMEX and ICE WTI by 13 million barrels to the lowest level for almost a year, according to exchange and regulatory records.

More significantly, funds cut their net long position in ICE Brent by 14 million barrels, the first reduction in six weeks, after increasing it by 172 million barrels since Aug 21.

Elsewhere, there were minor increases in net length in US gasoline (+6 million barrels) and US heating oil (+7 million barrels) but a small offsetting reduction in European heating oil (-4 million barrels).

The shift from accumulation to liquidation in Brent was especially notable because the fund managers had previously built the largest net long position since late May.

Fund managers had accumulated long positions amid fears US sanctions on Iran would leave the market short of seaborne crude, pushing Brent prices to their highest in almost four years.

Brent long positions had outnumbered short ones by a nearrecord margin of 19:1 before long liquidation and some fresh shorting trimmed the ratio to 15:1.

But the very stretched hedge fund position in Brent by the end of September significantly increased the risk of a reversal in prices, even before Saudi Arabia, Russia and the United States issued statements to cool the market.

US officials have revealed they are actively considering sanctions waivers for at least some of Iran’s customers, which should ease fears about a potential supply crunch.

And Saudi officials have confirmed the kingdom plans to raise its exports even further in October and November to relieve any shortfall from Iran.

Hedge funds had pushed oil up until they discovered the pain threshold for the White House and Saudi Arabia, with prices above $80 per barrel forcing the United States and Saudi Arabia to take action to restrain prices. (RTRS)