Bullish bets on oil high­est since 2014

Kuwait Times - - BUSINESS -

LON­DON: Hedge funds and other money man­agers have raised their bullish bets on US crude prices to the high­est level since the slump started in the sum­mer of 2014. Saudi Ara­bia and other OPEC mem­bers have suc­cess­fully pushed oil prices back above $50 by squeez­ing bear­ish fund man­agers (“Saudi Ara­bia squeezes hedge funds with bear­ish bets on oil”, Reuters, Oct 10).

Hedge funds raised their net long po­si­tion in the two main fu­tures and op­tions con­tracts linked to US crude WTI by 39 mil­lion bar­rels to 292 mil­lion bar­rels in the week to Oct 11. The com­bined po­si­tion was the high­est since July 2014, when WTI prices were still trad­ing above $100 per bar­rel and the long slide in prices was just be­gin­ning. Hedge funds have raised their com­bined po­si­tion by 155 mil­lion bar­rels since the mid­dle of Septem­ber and by 212 mil­lion bar­rels since early Au­gust, ac­cord­ing to data from the US Com­mod­ity Fu­tures Trad­ing Com­mis­sion. Most of the ad­just­ment has come from the short side of the mar­ket as hedge funds have cov­ered short po­si­tions es­tab­lished ear­lier in the sum­mer. Hedge funds have cut short po­si­tions in WTI-linked fu­tures and op­tions from a peak of 249 mil­lion bar­rels in early Au­gust to just 102 mil­lion bar­rels, a re­duc­tion of 146 mil­lion.

Over the same pe­riod, hedge fund long po­si­tions have risen from 329 mil­lion bar­rels to 394 mil­lion, an in­crease of just 65 mil­lion. Hedge funds have ac­cu­mu­lated and liq­ui­dated short po­si­tions in four dis­tinct cy­cles since the start of 2015. The ac­cu­mu­la­tion and liq­ui­da­tion of hedge fund short po­si­tions has cor­re­sponded closely with the rise and fall in oil prices. The fourth and most re­cent cy­cle of short-sell­ing be­gan in early June when WTI prices were just over $50 per bar­rel and the num­ber of short po­si­tions in WTI was equiv­a­lent to around 78 mil­lion bar­rels. The cy­cle peaked at early Au­gust, when the num­ber of short po­si­tions had risen to 220 mil­lion bar­rels, and WTI prices hit a low around $39-42. Since then short po­si­tions have been re­duced, some­what un­steadily, and by Oct 11 the num­ber of shorts had re­turned to 71 mil­lion bar­rels and prices were back just above $50. The re­duc­tion in short po­si­tions has pro­vided cru­cial sup­port to prices over the last 10 weeks and ex­plains why OPEC’s rel­a­tively weak out­put agree­ment reached in late Septem­ber had such a big im­pact on prices.

But the short cov­er­ing process has now run its course, with rel­a­tively few more short po­si­tions to cover, and is likely to pro­vide less sup­port to prices go­ing for­ward. US crude oil prices peaked at $51.60 on Oct 10 and have since strug­gled to rise fur­ther, which is con­sis­tent with the short-cov­er­ing rally be­ing largely over.

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