Hedge funds drop shorts on crude oil

Hedge funds and other money managers have started to shake off the gloomy expectations of a global recession and waning oil demand growth that had seized market participants for most of the fourth quarter last year. Over the past weeks, fund managers have run to cover a lot of short positions as OPEC's new production cuts and U.S. sanctions on Venezuela's oil have given a bullish push to the market.

Money managers have been lifting their combined net long position-the difference between bullish and bearish betsin Brent Crude for most of 2019 so far.

Yet, the primary driver for the increase in the net long position was the closing of the many shorts from late 2018, rather than a renewed bullishness that oil prices will be rallying.

Bullish cues such as OPEC's resolve to rebalance the market with another round of cuts and uncertainties about Venezuela's oil exports have supported oil prices in recent weeks, and short-sellers have run to cover bearish bets. The flight of the bears has resulted in an increased net long position, but the market will need clearer bullish signals for the bulls to return and wager on rising oil prices, analysts say. For the week ended January 29, fund managers raised their net long position in Brent Crude by 30 million barrels to 233 million barrels, according to data from ICE Futures Europe compiled by Reuters market analyst John Kemp. Related: Iran Puts ' Recoverable Reserves' At 160 Billion Barrels

Since early December, hedge funds have raised their net long position by a total of 96 million barrels and have increased the net long in seven out of eight weeks. However, the rise in the net long position since early December has been primarily the result of closing of the shorts, rather than a clear sign that bulls are back. Between December 11 and January 29, short positions declined by more than 60 percent from 122 million barrels to 48 million barrels, but longs increased by only 27 million barrels, as fund managers are less bearish but surely not enthusiastically bullish on the price of oil.

Oil prices fell in choppy trade, pulling back from two-month highs after weak U.S. factory orders data rekindled economic slowdown worries. Despite the slide, investors expect U.S. sanctions on Venezuela and production cuts led by OPEC to head off a glut this year, buoying prices. U.S. West Texas Intermediate futures ended Tuesday's session down 90 cents, or 1.7 percent, at $53.66 per barrel around 2:25 p.m. ET, near the day's low of $53.47. WTI touched its highest in more than two months at $55.75 in the previous session.

International Brent crude futures were down 41 cents at $62.10 a barrel around 2:25 p.m. ET, near a session low at $61.72 and well off Monday's two-month high of $63.63.

"I think the oil market is trying to decide whether the factory orders will weigh on the price or the Venezuela and oil sanctions will support the price. As a result, we've seen the market fluctuating," said Andrew Lipow, president of Lipow Oil Associates in Houston.

Oil is also modestly out of favor as investors reallocate assets, said Phillip Streible, senior commodities strategist at RJO Futures.

"They are all jumping into the equity markets and getting out of some of the other markets that may be weighed on by U.S.-China trade relations or markets affected by the dollar index," Streible said.

Wall Street was slightly higher, while the dollar also rose.

Still, analysts said U.S. sanctions on Venezuela are focusing market attention on tighter global supplies. Numerous tankers are currently in the water off the Venezuelan coast, unable to move because state-owned PVDSA is demanding payment, which would run afoul of U.S. sanctions.

Supplies of heavy crude oil produced in Venezuela are scarce, as other providers like Mexico and Canada have also faced challenges to output and export.

The Organization of the Petroleum Exporting Countries and its allies, including Russia, agreed to production cuts effective from last month to beat back increasing supply.

The oil industry generally believes the curbs will help to balance the market in 2019, particularly with crude supply growth out of the United States.

"You'll see OPEC disciplined and therefore prices look fairly robust around where they are," BP finance chief Brian Gilvary told Reuters, adding that he expects demand growth of 1.3 million to 1.4 million barrels per day in 2019 - similar to last year.

A Reuters survey found that supply from OPEC states had fallen the most in two years, with Saudi Arabia and its Gulf Arab allies over-delivering on pledged cuts while Iran, Libya and Venezuela registered involuntary declines.

Still, concerns about the pace of global economic growth remained. New orders for U.S.-made goods fell unexpectedly in November, with sharp declines in demand for machinery and electrical equipment, according to data released on Monday.