Hedge funds cut their net long position in the main crude futures and options contracts by 63 million barrels, 10 percent, in the week to June 14, as the rally in oil prices showed signs of running out of steam.
The one-week reduction in the net long position was the largest since July 2014, according to an analysis of data published by the US Commodity Futures Trading Commission and the Intercontinental Exchange.
Hedge funds and other money managers cut their combined net long position in the three main Brent and WTI futures and options contracts from a near-record 633 million barrels to 570 million.
The combined net long position in WTI on Intercontinental Exchange and the New York Mercantile Exchange was cut by 46 million barrels, 19 percent, to 198 million barrels.
The net long position in Brent on the Intercontinental Exchange was cut by 17 million barrels, 4 percent, to 372 million.
For some time, the concentration of bullish hedge fund positions has been one of the biggest short-term downside risk factors for oil prices.
If and when the hedge funds tried to take some of their profits from the big rise in prices during the first five months of the year by liquidating long positions, the rally was always in danger of a sharp reversal.
Some of the more tactically-minded hedge fund managers have been waiting for long liquidation as an opportunity to short the market aggressively.
Hedge funds’ bullish long positions were cut by 34 million barrels in the week to June 14 but short positions increased by 30 million barrels.
Aggressive shorting of oil prices has been most noticeable in the NYMEX WTI contract, where the number of hedge fund short positions increased by 19 million barrels in the week to June 14.
Over the last 14 days, hedge fund short positions in NYMEX WTI rose by a total of 43 million barrels, more than 80 percent, from the previous low of just 53 million barrels.
Unsurprisingly, the liquidation of hedge fund long positions and aggressive short selling has stalled the rally and seen both spot prices and timespreads come under pressure over the last fortnight.
Price weakness has been most pronounced in futures contracts nearest to expiry, which has caused the contango to widen moderately.
Some analysts have cited concerns about financial market risks associated with Britain’s forthcoming referendum on membership of the European Union as a catalyst for the drop in oil prices.
There are also signs that rising oil prices have begun to spur fresh oil and gas drilling in the United States which would be bearish for prices if it occurred too early.
In truth, once oil prices stopped rising and the traders sought to reduce their long positions, it was always likely there would be a pull back in oil prices.
The near-doubling of oil prices between late January and early June was fueled by a mixture of improving fundamentals and momentum-driven trading.
Take away the rising trend and some degree of retrenchment was more or less inevitable.
From a fundamental perspective, the risks for oil prices appear evenly balanced, with the possibility of stronger than expected production growth matched by rapid growth in consumption.
Most analysts predict oil production and consumption will be close to balance throughout the remainder of 2016 and 2017.
In the short term, the critical question is whether the hedge fund long liquidation and aggressive shorting will continue and pile further pressure on prices and spreads.
Hedge fund long positions remain unusually large while short positions are still modest, so there is more scope for both liquidation and shorting in the next few weeks.
Source: Arab News