Hedge fund short po­si­tions and oil prices in 2015

Kuwait Times - - BUSINESS - Kuwait oil price drops to $35.32pb

LON­DON: US oil prices have cy­cled be­tween $40 and $60 per bar­rel since the start of 2015 and the rise and fall has cor­re­sponded with the ac­cu­mu­la­tion and liq­ui­da­tion of hedge fund short po­si­tions.

There have been at least three cy­cles in WTI prices and hedge fund po­si­tions in the main NYMEX light sweet crude con­tract since the turn of the year. The first cy­cle be­gan at the start of the year and was com­pleted by mid-May. Money man­agers in­creased their short po­si­tion from 74 mil­lion bar­rels at the start of Jan­uary to a peak of 178 mil­lion bar­rels on March 17 be­fore re­duc­ing it to 53 mil­lion by May 12. Front-month WTI prices fell from $48 to a low of $43 in the mid­dle of March be­fore re­bound­ing to around $60 in mid-May.

The sec­ond cy­cle be­gan in mid-May and lasted un­til the mid­dle of Oc­to­ber. Hedge funds in­creased their short po­si­tions from 53 mil­lion to 163 mil­lion in midAu­gust be­fore cut­ting it to 90 mil­lion by mid-Oct. WTI prices swooned from nearly $60 to a low of $39 in late Au­gust be­fore re­cov­er­ing to al­most $50 in early Oc­to­ber.

The third cy­cle be­gan in late Oc­to­ber and ap­pears to be un­fin­ished. Hedge funds boosted short po­si­tions from 90 mil­lion to 154 mil­lion on Novem­ber 17. Prices dropped from $47 to around $40 though they have since re­cov­ered slightly.

The at­tached charts show the cor­re­spon­dence be­tween the ac­cu­mu­la­tion and liq­ui­da­tion of hedge fund short po­si­tions, as re­ported by the US Com­mod­ity Fu­tures Trad­ing Com­mis­sion, and NYMEX WTI prices since the start of 2015.

Low prices have gen­er­ally co­in­cided with large short po­si­tions held by the hedge funds, while high prices have occurred when hedge fund short po­si­tions have been small­est. Turn­ing from ab­so­lute lev­els to changes, oil prices have tended to fall while hedge funds were adding to short po­si­tions, and to rise when hedge funds were cut­ting them.

It is im­pos­si­ble to say for cer­tain whether the ac­cu­mu­la­tion and liq­ui­da­tion of hedge fund po­si­tions is caus­ing the rise and fall in WTI prices, or whether both prices and po­si­tions are re­spond­ing to ex­ter­nal fun­da­men­tals. But if hedge funds were trad­ing based on a for­ward-look­ing view of the mar­ket or prices re­vert­ing to the mean, short po­si­tions would have been greater when prices were higher (and had more scope to fall) and smaller when prices were lower (and there­fore had less room to fall fur­ther).

In­stead, the hedge funds ap­pear to be fol­low­ing a mo­men­tum strat­egy, in which the more prices fall the more they are ex­pected to de­cline even fur­ther in the near fu­ture.

The cor­re­la­tion be­tween WTI prices and hedge fund short po­si­tions has been 0.78 since the start of the year (com­pared with 0.71 be­tween 2012 and 2014). The cor­re­la­tion be­tween the change in WTI prices and the change in hedge fund short po­si­tions has been 0.63 in 2015 (com­pared with 0.51 be­tween 2012 and 2014). What can the cor­re­spon­dence be­tween prices and po­si­tion­ing tell us about the cur­rent un­fin­ished cy­cle?

In each of the first two cy­cles this year, WTI prices hit a trough of around $40-44, when hedge fund short po­si­tions hit a peak of 163-178 mil­lion bar­rels.

In the cur­rent cy­cle, prices hit a low of $40 with hedge fund short po­si­tions amount­ing to 154 mil­lion bar­rels on Nov 17 (the lat­est date for which both prices and po­si­tion­ing data are avail­able).

The fall in WTI prices to $40 is al­most ex­actly what would be ex­pected based on the re­ported ac­cu­mu­la­tion of hedge fund short po­si­tions. What hap­pens next? The short po­si­tion ac­cu­mu­lated by the hedge funds so far in the cur­rent cy­cle is close to the max­i­mum short po­si­tion reached in both the last two cy­cles.

If this turns out again to be the max­i­mum po­si­tion, past ex­pe­ri­ence sug­gests hedge funds will soon en­ter the liq­ui­da­tion phase of the cy­cle, try to re­duce their to­tal short po­si­tion, and prices will be­gin to rise. What could in­val­i­date that view? If the cur­rent short po­si­tion is not the max­i­mum and hedge funds con­tinue to ac­cu­mu­late short po­si­tions, WTI prices could con­tinue to fall. Equally, both hedge funds and prices could be re­spond­ing to some ex­ter­nal fac­tor which, if it changes, could al­ter the re­la­tion­ship be­tween them.

It is im­por­tant to stress that this is not sup­posed to be a model of WTI price de­ter­mi­na­tion be­cause it lacks a causal mech­a­nism and it fo­cuses on only one of the many fac­tors which may in­flu­ence oil prices. But it does sug­gest there has been an im­por­tant link be­tween oil prices and hedge fund trad­ing this year that is worth fur­ther in­ves­ti­ga­tion and that should be fac­tored into any dis­cus­sion of what hap­pens to prices next. — Reuters KUWAIT: Kuwait oil price dropped 37 cents to $35.32 per bar­rel yes­ter­day com­pared to USD 35.69 pb on Fri­day, Kuwait Petroleum Cor­po­ra­tion (KPC) said yes­ter­day. In in­ter­na­tional mar­kets, crude Brent’s trades sta­bi­lized, but those of Amer­i­can crude slightly dropped against back­drop of Saudi pledge to seek steady oil prices, al­though jit­ters per­sisted among traders due to mar­ket glut and US re­serves’ rise. Brent Blend’s price set­tled at $45.83 pb, ris­ing by 17 cents, and the Amer­i­can crude set­tled at $41.75 pb, fall­ing by 15 cents. — KUNA

SEOUL: Pedes­tri­ans pass food stalls on a street in Seoul yes­ter­day. — AFP

Newspapers in English

Newspapers from Kuwait

© PressReader. All rights reserved.