Hedge fund managers have never seemed so convinced that oil prices are set to rise rather than fall in the near term, according to the latest positioning data published by regulators and exchanges.
Fund managers remain super-bullish even though benchmark Brent prices have almost tripled over the last two years and are now trading at the highest level since November 2014.
Hedge funds and other money managers raised their net bullish position in the six most important futures and options contracts linked to the price of crude and fuels by 45 million barrels in the week to April 20.
The net bullish position was equivalent to 1.411 billion barrels of crude and fuels - enough to satisfy global oil consumption for more than two weeks.
The net long position was still below the record 1.484 billion barrels set back on Jan. 23 (https://tmsnrt.rs/2Jfts03).
But hedge fund managers have never been so overwhelmingly convinced prices are set to rise further rather than fall back.
Across the six major contracts, portfolio managers hold almost 14 long positions for every short one, compared with a ratio of less than 12:1 back on Jan. 23.
In total, funds hold 1.520 billion barrels of long positions across Brent, NYMEX and ICE WTI, U.S. gasoline, U.S. heating oil
and European gasoil.
The number of short positions has fallen to just 109 million barrels, down from 141 million in January, and the lowest number for at least five years.
There are plenty of reasons to be bullish about oil, including rapid growth in global oil consumption, continued supply restraint by OPEC, falling output in Venezuela and the possible re-imposition of sanctions on Iran.
OECD oil inventories have fallen back in line with the five-year average and are now below the average if adjusted for increased consumption.
Senior OPEC leaders have indicated they see room for prices to rise further and have no intention of boosting output before the end of 2018.
Nonetheless, the hedge fund community's positioning has become exceptionally lopsided, which could herald a sharp correction in prices if and when fund managers try to close some of their open positions.
Portfolio managers now have record or near-record ratios of long to short positions in WTI (11:1), Brent (15:1), U.S. gasoline (24:1) and European gasoil (45:1).
In the past, such lopsided positioning has often heralded a sharp reversal in prices when fund managers have attempted to exit from their positions.
But this time around few portfolio managers seem to be worried. Most seem convinced fundamentals will drive prices higher and eventually allow them to liquidate their long positions into a rising rather than a falling market.
The calculation could be right, but there are still reasons to be concerned by the sheer concentration of long positions.
Rising oil prices are filtering through into more drilling activity in the United States, which will support even faster growth in production by the end of 2018.
The number of rigs drilling for oil in the United States has risen in each of the last three weeks, in response to rising prices, after hitting a plateau during the previous seven weeks.
With oil prices now above the long-term average, oil consumption is no longer getting a boost from low prices and is increasingly reliant on strong economic growth around the world.
But the economic outlook is clouded by rising trade tensions, as well as late-cycle increases in interest rates in the United States and the other major economies.
Hedge fund managers have gambled everything on a goldilocks scenario in which oil prices rise without damaging demand or spurring too much shale drilling.
They also need the global economic expansion to continue without interruption throughout the rest of 2018 and 2019 to continue boosting oil consumption
at record rates.
Perhaps this Panglossian scenario will come to pass, but if it does not, lopsided hedge fund positioning could be setting the oil market up for some sharp price movements ahead.
By John Kemp