(John Kemp is a Reuters market analyst. The views expressed are
* Chart 1: tmsnrt.rs/2dFmMOP
* Chart 2: tmsnrt.rs/2dJwBbh
By John Kemp
LONDON, Oct 10 Saudi Arabia successfully
confounded hedge funds with bearish views on oil by reaching an
unexpected production deal with OPEC members in Algiers on Sept.
28, sending prices soaring in a short-covering rally.
Hedge funds and other money managers increased their net
long position in the three main Brent and WTI futures and
options contracts by a record 142 million barrels over the seven
days ending on Oct. 4 (tmsnrt.rs/2dFmMOP).
Hedge funds' net position surged from 471 million barrels on
the eve of the OPEC meeting to 612 million barrels seven days
Short positions were cut by 69 million barrels while an
extra 73 million of long positions were added, according to an
analysis of data from regulators and exchanges.
The surprise agreement sent front-month Brent prices
climbing by $5-6 per barrel as hedge funds scrambled to close
out losing short positions and add longs to capitalise on the
The Algiers agreement marked a sharp turning point in market
sentiment towards oil which had been deteriorating over the
Between late August and mid-September, hedge funds had cut
their net long position in Brent and WTI by 178 million barrels
(from 628 million to 449 million).
The Algiers agreement almost exactly reversed this shift and
has more or less returned the oil market to the position that
prevailed in late August.
Front-month Brent futures closed at $50.87 per barrel on Oct
4, essentially back to where they were on Aug. 23, when they
stood at $49.96.
Did Saudi Arabia deliberately set out to squeeze hedge funds
with bearish bets? The question is impossible to answer without
knowledge of private discussions within the petroleum ministry
and royal court.
But whether the squeeze was intentional or not, the
practical impact was the same, and triggered a furious short
There were still a fairly large number of short positions
uncovered on Oct. 4, which likely explains why prices continued
rising over the next few days.
But with short positions now sharply cut, and the net long
position within 51 million barrels of its record level of 663
million barrels set back in April, the scope for further
short-covering is much reduced.
(Editing by David Evans)