Hedge funds temper bullishness on oil

Hedge funds tempered their bullishness towards the entire petroleum complex during the first week of September, according to positioning data from regulators and exchanges.

Hedge funds and other money managers cut their combined net long position in the three major Brent and WTI futures and options contracts by 80 million barrels in the week ending September 6.

The decline was led by a big increase in short positions, which rose by 56 million barrels, especially in the WTI contracts, where short positions increased by 39 million barrels.

There was a more modest reduction in long positions, which fell 23 million barrels, with almost all the long liquidation in Brent, where long positions were down 20 million barrels.

Overall, the hedge funds’ net long position in crude has fallen by nearly 100 million barrels over the two most recent weeks, partially reversing a build of 287 million barrels over the three weeks before that.

The partial reversal reflects profit taking after Brent prices surged by almost $10 per barrel, more than 23 per cent, in the first part of August as some of the previous record short position was covered.

It also seems to reflect fresh short-selling in anticipation that long liquidation would trigger a new round of price falls.

The more cautious hedge fund position on crude was echoed in positions on U.S. gasoline blendstock and heating oil.

Hedge funds cut their net long position in gasoline by 5 million barrels and heating oil by 12 million barrels in the week ending on September 6.

Even after the recent adjustments, hedge fund positions across the entire complex of crude, gasoline and heating oil are still much more bullish than they were at the start of August.

Recent long liquidation and short sales may be just a minor correction after the unprecedented short-covering rally last month.

But with long positions still relatively high and short positions relatively low there is potentially scope for the correction to continue.

Since the start of 2015, hedge funds have accumulated and then liquidated short positions in four distinct cycles that have closely mirrored the fall and then rise of oil prices.

The critical question is whether the latest bout of short selling marks the start of a new cycle, the fifth, or is merely the continuation of cycle number four.