Hedge fund bets shift to renewed oil decline
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.