Hedge fund bullishness towards crude oil and refined products including gasoline and diesel appears to have peaked for now, according to an analysis of regulatory and exchange records.
Few long positions in crude and products were added by hedge funds and other money managers in the week to Oct.3, with some increasing short positions for the first time since August.
Hedge funds cut their combined net long position in the three major crude oil futures
and options contracts linked to Brent and WTI by 1 million barrels to 793 million (http://tmsnrt.rs/2zaCBCS).
While the reduction was tiny, it came after portfolio managers had increased their net long exposure by 212 million barrels over the previous four weeks and indicated a potential turning point.
For the first time since August, hedge funds increased short positions in NYMEX WTI by 4 million barrels over the week.
Fund managers trimmed their exceptionally bullish positioning in U.S. gasoline by 6 million barrels to 65 million barrels, which was also the first significant reduction since August.
Funds continued to add to their record net longs in U.S. heating oil and European gasoil by 220,000 barrels and 440,000 tonnes respectively, but the rate of accumulation slowed markedly.
The probable peak in hedge funds’ net long positions comes as no surprise.
Both the accumulation and liquidation of hedge fund positions and the rise and fall in prices show a strong cyclical element in the short run.
Speculative traders’ positioning across crude and especially refined fuels had looked increasingly lopsided in recent weeks as fund managers turned from very bearish in June to super-bullish by the end of September.
Brent prices have been drifting lower since Sept. 25 amid concerns that they had risen too far too fast and risked getting ahead of fundamentals.
The concentration of hedge fund positions had itself become an additional source of downside risk, with the likelihood that prices would fall when portfolio managers attempted to realise some of their profits.
Fund managers probably continued the reduction of their net longs in crude and fuels during the second half of last week, as evidenced by the continued slide in prices.
But with record or near-record net long positions in gasoline, heating oil and gasoil, and a strong bullish bias in crude positions, the balance of risks remains tilted towards the downside.
By John Kemp