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* Chart 1: tmsnrt.rs/2meDpzf
* Chart 2: tmsnrt.rs/2lduZua
* Chart 3: tmsnrt.rs/2ldKiTX
By John Kemp
LONDON, Feb 20 Hedge funds and other money
managers have amassed a very large bullish position in crude oil
futures and options without so far having much impact on oil
Hedge funds raised their combined net long position in the
three main derivative contracts linked to Brent and WTI by
another 51 million barrels in the week to Feb. 14.
Funds now hold a net long position equivalent to a record
903 million barrels of oil, according to an analysis of records
published by regulators and exchanges (tmsnrt.rs/2meDpzf).
The combined net long position has a notional valuation of
more than $49 billion, which is the highest since July 2014 (tmsnrt.rs/2lduZua).
Hedge funds hold more than 9.5 long positions for every 1
short position in Brent and WTI combined, the highest ratio
since May 2014 (tmsnrt.rs/2ldKiTX).
Fund managers now have the most bullish view on oil since
the first half of 2014, when Libya's exports were nearly halted
by civil war and Islamic State fighters were racing across
DOLLARS AND BARRELS
The scale of the net long position is puzzling and raises
important questions about how it will eventually unwind.
Fund managers have been able to increase their bullish bets
with almost no disturbance to the market price of crude.
Volatility has been most remarkable by its absence.
Funds have increased their net long position by 107 million
barrels since Dec. 13 while prices have traded sideways in a
narrow range of around $55.50 +/- $1.25 per barrel.
Oil prices have been steady at around the $55 level most
energy professionals expected would be the average for the year
at the start of 2017.
The accumulation of a large long or short position by fund
managers has normally been the harbinger of a sharp reversal in
oil prices when it unwinds.
So the massive net long position has triggered a heated
debate about whether hedge fund managers are fully invested yet
or have the potential to increase their exposure even further.
The record net position in barrels and high ratio of long to
short positions both indicate the position may already have
But that has not stopped hedge fund managers from continuing
to raise their combined position in four of the last six weeks.
And while the notional value of the net long position has
more than doubled from a recent low of $20 billion in the middle
of November it remains well below the peak of $69 billion
reported in July 2014.
The halving of oil prices since the mid-2014 means fund
managers can run a net position twice as large in barrel terms
for the same commitment of capital.
Some analysts therefore insist funds still have scope to
increase their exposure significantly in the weeks and months
But that raises questions about whether the very large hedge
fund position in mid-2014, immediately before the biggest slump
in prices for 30 years, is the right baseline for comparison.
FLIGHTY AND STICKY MONEY
There have been suggestions that much of the increase in net
long positions comes from pension funds and hedge funds pursuing
inflation-linked macro strategies rather than specialist
commodity funds and trend followers.
Capital committed by pension funds and macro funds may be
more sticky and less prone to abrupt reversals than commitments
from commodity specialists and trend chasers.
But there is no way to identify the different types of money
managers separately in the published data from regulators and
There is no way to prove or disprove the hypothesis that the
increase in net long positions is from sticky pension funds and
macro tourists rather than flight-prone commodity funds.
OPEC OFFERS A FREE OPTION
Perhaps a more likely explanation is that the production
cuts agreed by OPEC and non-OPEC in November and December 2016,
coupled with Saudi Arabia's resumption of its swing-producer
role, have appeared to remove much of the short-term downside
With OPEC putting a floor under prices at $50 per barrel,
there is no reason for hedge fund managers to run significant
short positions, and little downside risk to long positions at
OPEC has in effect given hedge funds a free put option,
reminiscent of the Greenspan put which underpinned equity
valuations in the late 1990s and early 2000s.
By taking away the downside, OPEC has encouraged hedge funds
to bet big on the upside, gambling on the possibility if not the
probability that oil prices will rally further as the market
rebalances or on some unexpected supply shortfall.
There is still a large overhang of long positions that will
need to be liquidated at some point in future.
But in the short term the risk of an abrupt liquidation of
hedge fund long positions has been reduced provided managers
believe OPEC would respond to any price slide by extending or
deepening its cuts and maintaining a high level of compliance.
Hedge funds have helped OPEC achieve its objective of higher
prices since the end of November, while OPEC has reassured fund
managers it will not allow them to lose too much money on their
OPEC has been explicit in managing expectations with sources
telling Reuters cuts could continue if stocks are still too high
by June ("OPEC could extend or deepen supply cut if oil glut
persists", Reuters, Feb. 16).
Large long positions are rarely stable. However, OPEC and
the hedge funds have created a one-way bet that will only fall
apart if oil demand slows, compliance falters, non-OPEC supplies
accelerate too much, or the hedge funds bail out.
(Editing by Louise Heavens)