LONDON (Reuters) - Hedge funds rediscovered some of their confidence in the oil market in the final week of February, as OPEC reiterated its commitment to output restraint and benchmark prices stabilised above $60 per barrel.
Hedge funds and other money managers boosted their combined net long position in the six most important futures and options contracts linked to petroleum prices by 68 million barrels in the week to Feb. 27.
Portfolio managers boosted their net long position for the first time after reducing it by a total of 263 million barrels over the previous four weeks, according to records published by regulators and exchanges.
Net length increased in Brent (+21 million barrels), NYMEX and ICE WTI (+18 million barrels), European gasoil (+15 million barrels), U.S. gasoline (+9 million barrels) and U.S. heating oil (+5 million barrels).
The mild bout of liquidation that occurred between mid-January and the middle of February appears to have run its course without making much of a dent in hedge fund long positions
Fund managers still hold more than 11 long futures and options positions for every short across the petroleum complex, not far off the record set at the end of January.
Bullish positions in crude and refined fuels remain at levels that had never been recorded before the start of this year, with fund managers holding long positions amounting to more than 1,400 million barrels.
Yet few dare express a contrary bearish view. Short positions actually declined by 11 million barrels in the most recent week to just 126 million, the lowest level since June 2014, when Islamist militants were threatening the oilfields of northern Iraq.
Lopsided hedge fund positioning remains an important source of downside risk to oil prices if and when fund managers try to realise some of their profits.
For the time being, however, most portfolio managers seem convinced prices will rise further before the eventual correction.
Global growth remains strong and oil consumption is set to increase by more than 1.5 million barrels per day for the fourth year running in 2018.
Most of the excess inventories that accumulated between 2014 and 2016 have been eliminated, with oil stocks in industrialised countries now reduced close to the five-year average.
Production from U.S. shale plays is rising strongly but OPEC’s willingness to sacrifice market share to support prices has convinced many investors that downside risk is limited in the near term.
For now, the oil market remains locked in a bullish phase (“Why stock markets crash: critical events in complex systems”, Sornette, 2003).
The bull market has survived its first test of resolve, but there will be others.
The opinions expressed here are those of the author, a columnist for Reuters.
“Hedge funds continue to exit oil but OPEC stems rout”, Reuters, Feb. 27
“Hedge funds lighten bullish positions in oil”, Reuters, Feb. 20
“Oil prices tumble as hedge funds liquidate record bullish position”, Reuters, Feb. 12
“Hedge funds pause oil buying as rally runs out of steam”, Reuters, Feb. 5
Editing by Dale Hudson