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* Chart 1: tmsnrt.rs/2cKtGgS
* Chart 2: tmsnrt.rs/2cCgpet
* Chart 3: tmsnrt.rs/2cCgSNB
* Chart 4: tmsnrt.rs/2cKuAdg
By John Kemp
LONDON, Sept 19 Hedge funds scaled back some of
their short positions in crude oil futures and options after
prices failed to fall further, suggesting the market was running
out of negative momentum.
Along with other money managers they cut their combined
short position in the three main Brent and WTI contracts by 36
million barrels in the week to Sept. 13.
This partially reversed an increase the previous week of 57
million barrels, according to an analysis of position data
published by regulators and exchanges which showed that money
managers cut their short positions in WTI by the equivalent of
25 million barrels and in Brent by 11 million barrels.
The fall in bearish short positions came as benchmark prices
steadied after dropping sharply since the middle of August.
Brent prices for November dropped just 16 cents between
Sept. 6 and Sept. 13, after declining by $1.47 and $1.59 in the
two previous weeks.
With the benchmark already down by more than $4 per barrel
from the recent high, and not falling any further in the short
term, some bearish hedge funds decided to take profits.
By contrast, there were few changes on the long side, and
certainly no sign of increased bullishness. Long positions fell
by 8 million barrels in WTI and 3 million barrels in Brent.
The combined impact of these changes is that hedge funds and
other money managers increased their net long position in crude
futures and options by a modest 26 million barrels to 555
million barrels (tmsnrt.rs/2cKtGgS).
The overall impression is of a market stuck in an uneasy
truce after bulls and bears fought each other to a standstill.
Hedge funds boosted their net long position by a record 287
million barrels over just three weeks between Aug. 2 and Aug.
The rapid gains produced an almost inevitable reaction with
the net long position cut by 99 million barrels over the next
two weeks from Aug. 23 to Sept. 6.
Now the reaction has produced its own counter-reaction, with
the net long position boosted by 26 million barrels in the week
to Sept. 13.
But overall the price and position fluctuations have grown
smaller, which suggests the market has been groping towards a
new level (tmsnrt.rs/2cCgpet).
Brent prices are now close to the midpoint ($46.50) of their
recent trading range ($41-$52) which is another reason why there
is no strongly bullish or bearish tendency.
CYCLE 4 WINDS DOWN
The oil market has experienced four cycles of hedge fund
short-selling since the start of 2015.
The accumulation and liquidation of short positions has
corresponded with the fall and rise in prices, especially in the
NYMEX WTI contract (tmsnrt.rs/2cCgSNB).
The start and end of these accumulation and liquidation
cycles are clearly identifiable in retrospect, but are never so
clear cut at the time.
The big increase in hedge fund short positions reported in
the week between Aug. 30 and Sept. 6 was a possible signal that
a possible fifth short-selling cycle might be underway ("Hedge
funds temper bullishness on oil", Reuters, Sep 12).
But the reduction in short positions in the week to Sept. 13
suggests the market is probably still in the tail end of the
liquidation phase of Cycle 4 (tmsnrt.rs/2cKuAdg).
If that proves correct, further short-covering could provide
some support for oil prices in the short term, but with short
positions already reduced so far, the degree of support is
likely to be modest.
(Editing by Alexander Smith)