Hedge funds turn bear­ish on oil at record rate

Kuwait Times - - BUSINESS -

LON­DON: Hedge funds turned bear­ish to­wards oil prices at the fastest rate on record in the first week of Novem­ber amid grow­ing doubts about whether OPEC will reach a suc­cess­ful deal to curb its grow­ing pro­duc­tion. Hedge funds and other money man­agers cut their net long po­si­tion in Brent and West Texas In­ter­me­di­ate (WTI) fu­tures and op­tions by 149 mil­lion bar­rels in the week end­ing Nov 8.

The weekly re­duc­tion in net long po­si­tions was the largest on record, ac­cord­ing to an anal­y­sis of data pub­lished by reg­u­la­tors and ex­changes. The sell-off in crude prices, which has been un­der way for three weeks, was ini­tially led by the liq­ui­da­tion of stale long po­si­tions, but the most re­cent week saw the emer­gence of a heavy wave of fresh short­selling. Hedge funds in­creased their short po­si­tions across the three main crude con­tracts by 135 mil­lion bar­rels in the seven days to Nov. 8, while long po­si­tions were cut by 13 mil­lion bar­rels.

Hedge funds’ short po­si­tions in the flag­ship NYMEX WTI con­tract in­creased by 83 mil­lion bar­rels. This is the fifth time since the start of 2015 that hedge funds have ac­cu­mu­lated a very large short po­si­tion in NYMEX WTI. Each time the hedge funds have amassed a large short po­si­tion oil prices have fallen, only to rise again when the shorts are closed out. The cycles of short-sell­ing and the rise and fall in oil prices have been closely syn­chro­nized and had a strongly pre­dictable com­po­nent. But the cycles have be­come faster and deeper as more mo­men­tum-driven hedge funds trade the cycli­cal be­hav­ior. The en­tire short-sell­ing cy­cle is ac­cel­er­at­ing.

The cur­rent cy­cle has been the most ag­gres­sive so far with short po­si­tions es­tab­lished at the fastest rate on record. Hedge funds ac­cu­mu­lated an ex­tra 89 mil­lion bar­rels of short po­si­tions in NYMEX WTI in just a fort­night. The to­tal short po­si­tion in NYMEX WTI on Nov 8 at 145 mil­lion bar­rels was still well be­low the max­i­mum short po­si­tion recorded on Aug 9 of 220 mil­lion bar­rels. But it is likely fur­ther short po­si­tions have been added since Nov 8 as crude prices con­tin­ued to trend lower. With long po­si­tions sharply re­duced from their re­cent peak and short po­si­tions in­creased, the bal­ance of risks has shifted to the up­side.

Oil traders and hedge funds are bet­ting the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries will fail to reach a pro­duc­tion deal at its next min­is­te­rial meet­ing at the end of Novem­ber, or that any deal will be weak and lack cred­i­bil­ity. Sim­i­lar scep­ti­cism was ex­pressed be­fore the last OPEC meet­ing in Septem­ber. The es­tab­lish­ment of large short po­si­tions left the mar­ket vul­ner­a­ble to a short squeeze when a sur­prise deal was an­nounced.

The re­newed wave of short-sell­ing and fall in oil prices will in­ten­sify pres­sure on OPEC oil min­is­ters to reach a deal be­fore the end of the month or risk trig­ger­ing an even deeper sell-off. Pol­i­cy­mak­ers from OPEC coun­tries have launched an in­ten­si­fied round of shut­tle diplo­macy in re­cent days in re­sponse to the in­creased stakes. The out­look for oil prices is not a one-way bet from here given how many short po­si­tions have al­ready been es­tab­lished. Even with­out OPEC, the large short po­si­tions run by hedge funds have left the mar­ket poised to rally if and when prices stop fall­ing and bear­ish man­agers lock in prof­its by buy­ing back some shorts.

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