Hedge fund bets shift to re­newed oil de­cline

Financial Times Middle East - - Markets & Investing - DAVID SHEP­PARD EN­ERGY MAR­KETS ED­I­TOR

Hedge funds are un­wind­ing a near-bil­lion-bar­rel spec­u­la­tive oil po­si­tion at a record pace, slash­ing bets on ris­ing prices and wa­ger­ing on a re­newed slump be­low $50 a bar­rel.

In the past week funds have re­duced their net long po­si­tion by 153m bar­rels across the two bench­mark con­tracts, the biggest one-week cut on record and equiv­a­lent to al­most two days of global crude de­mand.

Oil slumped to a three­month low last week, with doubts ris­ing about Opec’s abil­ity to re­duce a sup­ply glut that has dom­i­nated mar­ket sen­ti­ment since mid -2014.

Po­si­tion­ing data from reg­u­la­tors and ex­changes con­firmed that funds had been big sell­ers as North Sea Brent dropped as low as $50.25 a bar­rel and West Texas In­ter­me­di­ate hit $47.09.

It was the third straight week of sell­ing by funds since their bets on ris­ing oil prices hit a his­toric peak of 951m bar­rel sin late Fe­bru­ary.

“Ris­ing US in­ven­to­ries and pro­duc­tion, com­bined with doubts about the ef­fec­tive­ness of Opec and non-Opec pro­duc­ers’ cut­ting ef­forts, helped trig­ger a long over­due re­ac­tion from funds,” said O le Hansen at Saxo Bank.

Those funds “had been buy­ing into a stale mar­ket for weeks”, he added.

An­a­lysts and traders say the re­main­ing net long po­si­tion is still more than 820m bar­rels, leav­ing scope for fur­ther pres­sure on the mar­ket if more funds close out po­si­tions. Brent is 12 per cent be­low its high for the year.

Po­si­tion­ing in the oil mar­ket has been closely mon­i­tored this year af­ter hedge funds lined up to back the at­tempt of Opec and al­lies such as Rus­sia to agree the first joint pro­duc­tion curbs this decade.

Af­ter sup­ply cuts were agreed late last year, spec­u­la­tive buy­ers ploughed in, and prices rose al­most 25 per centin De­cem­ber.

But oil prices then set­tled into an un­com­monly nar­row range as US pro­duc­ers rushed to hedge out­put, sell­ing fu­tures con­tracts to lock in prices ahead of any fu­ture down­turn.

Prices fi­nally broke out of the range two weeks ago as Saudi Ara­bia, Opec’s most pow­er­ful mem­ber, ac­knowl­edged that US pro­duc­tion was re­cov­er­ing and in­ven­to­ries were not fall­ing as fast as they had an­tic­i­pated.

As doubts have grown about oil’s strength, funds have added short po­si­tions in a bet on the 9 per cent slide since early March ex­tend­ing.

About 70m bar­rels, more than 45 per­cent of the re­duc­tion in the net long po­si­tion last week, came from new shorts.

Yes­ter­day JP Mor­gan cut its fore­cast for 2017 to $55.75 a bar­rel, and said prices could be even lower next year.

Many traders still ex­pect the mar­ket to tighten, es­pe­cially if Opec’s cuts are ex­tended for a fur­ther six months when the car­tel next meets in May.

Any fall in in­ven­to­ries in the sec­ond half could en­cour­age funds to main­tain their bullish bets.

“The best course of ac­tion for Opec is to say noth­ing and let mar­kets do the work for the next few months,” said an­a­lyst sat En­ergy As­pects.

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