(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, April 30 Oil hedgers held the smallest
net short position in WTI-linked futures and options for at
least six years in the week ended April 24, according to
commitments of traders data published by the U.S. Commodity
Futures Trading Commission (CFTC).
This physical hedgers category, which the CFTC identifies as
“producers, merchants, processors and users” (who use futures
predominantly to manage or hedge risks), typically runs an
overall short position in U.S. crude futures and options
<0#CL:>, according to CFTC records.
Companies that sell or store physical oil and run a short
position in futures and options to hedge price changes generally
run larger positions than oil buyers who hedge their price
exposure with a long futures position.
But that net overall short position has been dwindling since
the start of 2010. At the close of business on April 24, short
futures hedges outnumbered long ones by just 15 million barrels,
down from 220 million at the same point in 2011 and 256 million
barrels in 2010 (Chart 1).
If the net position continues to adjust at the same rate,
producers/merchants/processors/users will find themselves net
long of WTI-linked futures and options this week for the first
time since at least 2006 (Chart 2).
FROM PRODUCERS TO BANKS AND DEALERS
The shrinking net short position held by physical hedgers is
part of a big realignment of the oil derivatives market.
Until 2011, producers/merchants/processors/users were the
major net sellers of futures and options, while hedge funds and
other money managers were the main buyers.
This accorded with the theory of risk transfer and hedging
pressure popularised by John Maynard Keynes and others in the
1920s and 1930s. Producers transferred (downside) price risk to
investors by selling production forward, or hedging inventories,
while investors gained exposure to any upward move in oil prices
by buying derivatives.
The remaining positions were supplied by swap dealers, who
were sometimes net long, sometimes short, depending on the
imbalance between physical hedging and investor buying.
But two things have happened since 2010 and especially the
start of 2011. First, net sales of futures and options by
producers/merchants/processors/users have dwindled and now
nearly vanished altogether. Second the swap dealers have stepped
into the void to become the main sellers of futures and options
to hedge funds and other money managers.
Swap dealers have not run a net long position in WTI since
September 2010. In March, dealers ran a record net short of 404
million barrels of oil. It was the direct counterpart of the
massive net long of 290 million barrels run by hedge funds and
other money managers. Producers etc supplied only 53 million
barrels of net short positions.
WHERE HAVE THE PHYSICAL SELLERS GONE?
It is not clear why the producer/merchant/processor/user
community has stopped being a supplier of net short positions.
One possibility is that producers and stock holders have cut
their forward sales as working inventories have fallen and WTI
remains depressed compared with Brent, especially for forward
dates, where WTI prices are subject to large discounts.
Producers may prefer to retain price risk in the hope of
realising higher prices in future, rather than accept big
discounts for locking in prices now. WTI futures for December
2014 are currently priced under $97 per barrel, compared with
spot prices of $105.
Another possibility is that some producers have switched
from hedging in WTI to Brent. WTI prices have been depressed
owing to congestion around Cushing, while Brent is a better
benchmark for seaborne crude sales.
A third explanation is that some hedgers, such as large oil
companies formerly classified as producers, merchants and
processors, have been reclassified as swap dealers, or that
hedging previously conducted by oil companies is now being
undertaken by banks and other dealers instead.
We don’t know. The CFTC will not disclose data on how it
classifies market participants and on whether the policy has
changed, despite requests, so we don’t know if the shrinking
producers/merchant/processor positions are due to
reclassifications, a change of behaviour or a combination of
The lack of an explanation is unfortunate, because the
disappearance of the producer/merchant/processor/user net short
is as much a driver of oil prices as the accumulation of a
massive net long by the hedge funds.
(editing by Jane Baird)
((firstname.lastname@example.org)(+44 207 542 9726)(Reuters
Keywords: COLUMN US OIL HEDGES
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