The wave of investor bullishness towards oil that started back in July and August may have peaked at the end of September, according to the latest position records published by regulators and exchanges.
Hedge funds and other money managers cut their net long position in the five major futures and options contracts linked to petroleum by a total of 32 million barrels in the week to Oct. 10.
Hedge funds cut their net long position in every one of the major benchmarks including Brent (-16 million barrels), WTI (-7 million barrels), U.S. gasoline (-4 million) and U.S. heating oil
Fund managers had accumulated a record number of long positions in the petroleum complex by the end of September and the net position in many individual contracts was at or close to record levels.
But fund managers have now cut their net long position in petroleum for two weeks in a row and oil prices have generally drifted lower since the end of last month (http://tmsnrt.rs/2xKikXS).
Adding to the downward pressure on prices, portfolio managers also cut their net long position in European gasoil by almost 1.6 million tonnes last week from the record of 18 million tonnes set the week before.
Investor positioning in petroleum markets had become stretched by the end of September, as many traders and analysts noted at the time.
Since the start of 2015, lopsided positioning by hedge funds and other money managers has been a good indicator of an approaching reversal in prices.
So the concentration of long positions and absence of shorts posed an increasing risk of a price correction in the event the rally stalled and fund managers attempted to realise some of their profits.
Some investors are already anticipating a renewed down-cycle in prices with short positions in NYMEX WTI increasing by more than 17 million barrels since Sept. 26.
Positioning and fundamentals now point in opposite directions which will create some short-term tension in oil prices.
A synchronised global economic expansion and strong growth in oil consumption
and heavy refinery runs should continue to reduce global oil inventories and push oil prices higher in 2018.
In the short term, the threat of conflict in northern Iraq
and the potential disruption of oil production and pipeline exports from the Kirkuk area could also boost prices.
But the overhang of hedge fund long positions built up since the end of July may limit further price rises until it has been worked down to a more sustainable level.
By John Kemp