Saudi squeezes hedge funds with bear­ish bets on oil

Kuwait Times - - BUSINESS -

Saudi Ara­bia suc­cess­fully con­founded hedge funds with bear­ish views on oil by reach­ing an un­ex­pected pro­duc­tion deal with OPEC mem­bers in Al­giers on Sept. 28, send­ing prices soar­ing in a short­cov­er­ing rally. Hedge funds and other money man­agers in­creased their net long po­si­tion in the three main Brent and WTI fu­tures and op­tions con­tracts by a record 142 mil­lion bar­rels over the seven days end­ing on Oct 4.

Hedge funds’ net po­si­tion surged from 471 mil­lion bar­rels on the eve of the OPEC meet­ing to 612 mil­lion bar­rels seven days later. Short po­si­tions were cut by 69 mil­lion bar­rels while an ex­tra 73 mil­lion of long po­si­tions were added, ac­cord­ing to an anal­y­sis of data from reg­u­la­tors and ex­changes.

The sur­prise agree­ment sent front­month Brent prices climb­ing by $5-6 per bar­rel as hedge funds scram­bled to close out los­ing short po­si­tions and add longs to cap­i­talise on the rally’s mo­men­tum. The Al­giers agree­ment marked a sharp turn­ing point in mar­ket sen­ti­ment to­wards oil which had been de­te­ri­o­rat­ing over the pre­vi­ous month.

Be­tween late Au­gust and midSeptem­ber, hedge funds had cut their net long po­si­tion in Brent and WTI by 178 mil­lion bar­rels (from 628 mil­lion to 449 mil­lion). The Al­giers agree­ment al­most ex­actly re­versed this shift and has more or less re­turned the oil mar­ket to the po­si­tion that pre­vailed in late Au­gust.

Front-month Brent fu­tures closed at $50.87 per bar­rel on Oct 4, es­sen­tially back to where they were on Aug. 23, when they stood at $49.96.

Did Saudi Ara­bia de­lib­er­ately set out to squeeze hedge funds with bear­ish bets? The ques­tion is im­pos­si­ble to an­swer without knowl­edge of pri­vate dis­cus­sions within the pe­tro­leum min­istry and royal court.

But whether the squeeze was in­ten­tional or not, the prac­ti­cal im­pact was the same, and trig­gered a fu­ri­ous short cov­er­ing rally. There were still a fairly large num­ber of short po­si­tions un­cov­ered on Oct 4, which likely ex­plains why prices con­tin­ued ris­ing over the next few days. But with short po­si­tions now sharply cut, and the net long po­si­tion within 51 mil­lion bar­rels of its record level of 663 mil­lion bar­rels set back in April, the scope for fur­ther short­cov­er­ing is much re­duced. — Reuters

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