(John Kemp is a Reuters market analyst. The views expressed are
* Chart 1: tmsnrt.rs/2jkKeOm
* Chart 2: tmsnrt.rs/2jur904
By John Kemp
LONDON, Jan 9 Hedge funds amassed a record
bullish position in crude oil futures and options by the end of
last year, which helped drive crude prices sharply higher in the
final six weeks of 2016.
Fund managers had accumulated a net long position in the
three main futures and options contracts linked to Brent and
West Texas Intermediate (WTI) equivalent to 796 million barrels
by Dec. 27 (tmsnrt.rs/2jkKeOm).
The net position was almost double the 422 million barrels
fund managers held on Nov. 15, according to an analysis of
position data published by regulators and exchanges.
But most of the bullish positions were in place by the
middle of December and since then there has been no further
position building (tmsnrt.rs/2jur904).
The first position reports of the new year show hedge funds
actually cut their combined position in the three main contracts
by 6 million barrels in the week to Jan. 3.
The question is whether hedge funds are now fully invested
in crude or will continue to increase their positions in the
Traders have had plenty of time to digest the output cuts
announced by OPEC and non-OPEC producers in November and
Since just before the agreements, bullish long positions
have been increased by around 170 million barrels while bearish
short positions have been cut by about 230 million barrels.
By the end of 2016, fund managers held the fewest short
positions in NYMEX WTI since oil prices started sliding in the
summer of 2014.
There are no more short positions to be squeezed, while long
positions have reached their highest recorded level ("OPEC
convinces hedge fund managers but must now deliver", Reuters,
The turnaround from bearish to bullish has been the largest
in history and helped push benchmark Brent prices up by
one-third or nearly $15 per barrel ("Saudi Arabia engineers big
shift in oil market sentiment", Reuters, Dec. 14).
But if all the shorts have been squeezed and hedge fund
managers are fully invested, the lack of new money will remove
one of the factors propelling prices higher.
Once prices stop rising, they are likely to correct lower,
as traders employing momentum-based strategies liquidate at
least some of their long positions to lock in profits.
The large concentration of hedge fund long positions has
therefore introduced an element of downside risk into the
short-term outlook for oil prices.
There may be more money waiting on the sidelines ready to be
committed to bullish bets on oil in the near term.
Fundamentals could also surprise on the upside if oil supply
falls more than expected or consumption accelerates.
Trading is usually quiet around the Christmas and New Year
period, which could explain the lack of further long-position
building since the middle of December.
But the first new short positions have already started to
emerge in WTI as some traders anticipate at least a temporary
pullback in prices.
Fund managers added 8 million barrels of fresh short
positions in the main WTI contracts on the New York Mercantile
Exchange and Intercontinental Exchange in the week to Jan. 3.
These were the first significant extra short positions added
since early November, suggesting at least some fund managers
think prices have peaked for now.
(Editing by Dale Hudson)