(John Kemp is a Reuters market analyst. The views expressed are
* Chart 1: tmsnrt.rs/2ribYrB
* Chart 2: tmsnrt.rs/2qJ0n86
* Chart 3: tmsnrt.rs/2qIOcYS
* Chart 4: tmsnrt.rs/2qIN4V1
* Chart 5: tmsnrt.rs/2qIVDiQ
By John Kemp
LONDON, May 15 Hedge funds had become
increasingly bearish towards crude oil by the middle of last
week, leaving them vulnerable to a short squeeze with OPEC's
next meeting coming up on May 25.
In fact, hedge fund positioning in crude is nearly identical
to before the last OPEC meeting held on Nov. 29, which was
followed by a fierce short-covering rally (tmsnrt.rs/2ribYrB).
Even the level of oil prices is similar (tmsnrt.rs/2qJ0n86).
By May 9, hedge funds and other money managers held a net
long position in the three main Brent and WTI futures and
options contracts amounting to just 475 million barrels (tmsnrt.rs/2qIOcYS).
Fund managers had cut their net long position by a
cumulative 308 million barrels since April 18, according to an
analysis of position data published by regulators and exchanges
Bullish long positions had been trimmed by 135 million
barrels over the three week period while bearish short ones had
been increased by 173 million barrels.
Fund managers had raised their short positions in Brent and
WTI to 334 million barrels, the highest level of short sales
since before OPEC announced its production cuts on Nov. 29.
The ratio of hedge fund long to short positions fallen to
just 2.4:1 from a recent high of 5.8 on April 18 (tmsnrt.rs/2qIVDiQ).
Bearishness had spread well beyond crude to key refined
products such as U.S. gasoline and distillate fuel oil as fund
managers began to worry that the surplus of crude was being
turned into a glut of products.
By May 9, hedge funds were running a net short position of
21 million barrels in U.S. gasoline and 9 million barrels in
But the large build up in short positions across both crude
and fuels left the oil market looking stretched on the downside
and poised for a short-covering rally.
Crude prices started rising on May 10 and have continued
increasing with more gains today following the announcement that
Saudi Arabia and Russia have agreed on the need to extend the
cuts for a further nine months ("Saudi Arabia, Russia push to
extend oil output cuts to March 2018," Reuters, May 15).
The last OPEC meeting in November 2016 sparked a big rally
as short positions were closed and fresh longs established
("Saudi Arabia engineers big shift in oil market sentiment",
Reuters, Dec. 13).
Hedge funds currently hold a very similar position to the
one they held on Nov. 29 before the OPEC deal was announced
which raises the question of whether the outcome will be the
Fund managers currently hold 809 million barrels of Brent
and WTI long positions compared with 800 million in November.
Short positions total 334 million barrels compared with 300
million barrels in November.
The critical issue is whether OPEC can engineer a similar
price rise by extending the existing agreement for an additional
The answer depends in part on how the extension is framed
and perceived by hedge funds and other crude traders.
At one level, the extension is an admission that cuts have
not drained inventories as fast as expected, which is a bearish
indicator ("Oil prices drop as OPEC loses control of narrative",
Reuters, May 5).
But by extending them for a further nine months, and
pledging to do "whatever it takes" to bring inventories down to
the five year average, Saudi Arabia and OPEC are attempting to
OPEC is trying its own version of the Fed's "forward
guidance" to shift expectations in a more bullish direction
("OPEC signals cuts extension, oil traders ponder response",
Reuters, May 8).
The question is whether it will work second time around.
Plenty of hedge fund managers and banks want to get bullish
again and see the recent drop in oil prices as a buying
But with U.S. oil output rising and the first phase of the
OPEC/non-OPEC agreement proving a disappointment there may be
greater caution this time.