(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chart 1: tmsnrt.rs/2ribYrB
* Chart 2: tmsnrt.rs/2qJ0n86
* Chart 3: tmsnrt.rs/2qIOcYS
* Chart 4: tmsnrt.rs/2qIN4V1
* Chart 5: tmsnrt.rs/2qIVDiQ
By John Kemp
LONDON, May 15 (Reuters) - Hedge funds had become increasingly bearish towards crude oil by the middle of last week, leaving them vulnerable to a short squeeze with OPEC's next meeting coming up on May 25.
In fact, hedge fund positioning in crude is nearly identical to before the last OPEC meeting held on Nov. 29, which was followed by a fierce short-covering rally (tmsnrt.rs/2ribYrB).
Even the level of oil prices is similar (tmsnrt.rs/2qJ0n86).
By May 9, hedge funds and other money managers held a net long position in the three main Brent and WTI futures and options contracts amounting to just 475 million barrels (tmsnrt.rs/2qIOcYS).
Fund managers had cut their net long position by a cumulative 308 million barrels since April 18, according to an analysis of position data published by regulators and exchanges (tmsnrt.rs/2qIN4V1).
Bullish long positions had been trimmed by 135 million barrels over the three week period while bearish short ones had been increased by 173 million barrels.
Fund managers had raised their short positions in Brent and WTI to 334 million barrels, the highest level of short sales since before OPEC announced its production cuts on Nov. 29.
The ratio of hedge fund long to short positions fallen to just 2.4:1 from a recent high of 5.8 on April 18 (tmsnrt.rs/2qIVDiQ).
Bearishness had spread well beyond crude to key refined products such as U.S. gasoline and distillate fuel oil as fund managers began to worry that the surplus of crude was being turned into a glut of products.
By May 9, hedge funds were running a net short position of 21 million barrels in U.S. gasoline and 9 million barrels in heating oil.
But the large build up in short positions across both crude and fuels left the oil market looking stretched on the downside and poised for a short-covering rally.
Crude prices started rising on May 10 and have continued increasing with more gains today following the announcement that Saudi Arabia and Russia have agreed on the need to extend the cuts for a further nine months ("Saudi Arabia, Russia push to extend oil output cuts to March 2018," Reuters, May 15).
The last OPEC meeting in November 2016 sparked a big rally as short positions were closed and fresh longs established ("Saudi Arabia engineers big shift in oil market sentiment", Reuters, Dec. 13).
Hedge funds currently hold a very similar position to the one they held on Nov. 29 before the OPEC deal was announced which raises the question of whether the outcome will be the same.
Fund managers currently hold 809 million barrels of Brent and WTI long positions compared with 800 million in November. Short positions total 334 million barrels compared with 300 million barrels in November.
The critical issue is whether OPEC can engineer a similar price rise by extending the existing agreement for an additional nine months.
The answer depends in part on how the extension is framed and perceived by hedge funds and other crude traders.
At one level, the extension is an admission that cuts have not drained inventories as fast as expected, which is a bearish indicator ("Oil prices drop as OPEC loses control of narrative", Reuters, May 5).
But by extending them for a further nine months, and pledging to do "whatever it takes" to bring inventories down to the five year average, Saudi Arabia and OPEC are attempting to influence expectations.
OPEC is trying its own version of the Fed's "forward guidance" to shift expectations in a more bullish direction ("OPEC signals cuts extension, oil traders ponder response", Reuters, May 8).
The question is whether it will work second time around.
Plenty of hedge fund managers and banks want to get bullish again and see the recent drop in oil prices as a buying opportunity.
But with U.S. oil output rising and the first phase of the OPEC/non-OPEC agreement proving a disappointment there may be greater caution this time.