(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chartbook: tmsnrt.rs/2LpJ0Ek
By John Kemp
LONDON, May 7 (Reuters) - Hedge fund managers have started to increase their bearish oil positions for the first time since the start of the year, amid signs the previous bull run had become overextended and prices were ripe for a correction.
Hedge funds and other money managers were net sellers of the six major petroleum futures and options contracts in the week to April 30, bringing to an end a record-breaking 15-week run of net purchases.
Portfolio managers cut their net long position by 17 million barrels last week, after having raised it by a total of 609 million since Jan. 8 (tmsnrt.rs/2LpJ0Ek).
Funds were net sellers last week of NYMEX and ICE WTI (-19 million barrels), U.S. heating oil (-2 million barrels) and European gasoil (-8 million barrels).
Net sales were only partially offset by small purchases of Brent crude (+8 million barrels) and U.S. gasoline (+3 million), according to position records published by regulators and exchanges.
Before the sales, positions in crude and especially gasoline had started to look very lopsided, increasing the probability fund managers would reduce some of their length and reverse the recent bullish price trend.
Fund long positions outnumbered short ones by a margin of 35:1 in gasoline, 11:1 in crude and 3:1 in middle distillates on April 23.
Following last week’s sales, the long-short ratios have been trimmed slightly to 28:1 in gasoline, 9:1 in crude and 2:1 in middle distillates.
From a fundamental perspective, spot oil prices and calendar spreads appear poised to rise further, provided the global economy avoids a recession.
Fund managers are betting U.S. sanctions on Iran and Venezuela combined with output restraint by Saudi Arabia will cause the crude market to tighten significantly in the second half of 2019.
They are also anticipating that U.S. refineries will process record amounts of crude to stabilise gasoline inventories this summer and then build distillates stocks before new maritime fuel rules at the end of the year.
Record crude processing should tighten the global oil market even further in the remainder of the year, which is showing up in a big backwardation in crude futures prices.
Brent’s calendar spread for July to December has climbed to a backwardation of more than $2.80 per barrel, up from $1.80 a month ago, and a small contango at the start of the year.
From a positioning perspective, however, hedge fund managers are already heavily committed to the bullish narrative.
With so much speculative money riding on a further rise in prices, and few short positions left to squeeze, oil prices had become increasingly vulnerable to a correction.
The resulting short-selling has seen Brent prices drift down from around $75 per barrel on April 25 to just above $70 now.
- Oil market will tighten sharply when U.S. refineries return from maintenance (Reuters, May 3)
- Diesel traders anticipate shortage, but not just yet (Reuters, April 30)
- Oil prices stumble as hedge funds become overextended (Reuters, April 29)
- Hedge funds bet big on spike in U.S. gasoline prices (Reuters, April 24) (Editing by Edmund Blair)