November 18, 2019 / 12:59 PM / 2 months ago

Column: Oil price rally squeezes bears, but bulls keep powder dry

LONDON (Reuters) - Hedge fund managers continued to scale back short positions in crude last week amid receding fears of a global recession and increasing signs of a slowdown in U.S. oil production growth next year.

A view of the West Qurna-1 oilfield, which is operated by ExxonMobil, is seen during the opening ceremony near Basra, Iraq June 17, 2019. REUTERS/Essam Al-Sudani

Hedge funds and other money managers were net buyers of positions equivalent to 41 million barrels in the six major petroleum futures and options contracts in the week to Nov. 12.


Funds have purchased 176 million barrels in the last five weeks, after selling 206 million in the previous three weeks, according to ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

In the most recent week, funds reduced existing bearish short positions by 31 million barrels while adding 10 million barrels of new long positions.

Portfolio managers were buyers of NYMEX and ICE WTI (+40 million barrels) and Brent (+28 million) but sold U.S. gasoline (-8 million), U.S. heating oil (-6 million) and European gasoil (-13 million).

But the preponderance of short positions closed, rather than long positions opened last week, suggests most recent changes are being driven by reduced pessimism rather than any great optimism about the economy.

The rotation out of refined fuels and towards crude also suggests caution about the health of oil demand and a focus on production losses as a result of the slump in prices over the last year.

Short positions in NYMEX WTI have fallen by almost 62 million barrels (49%) since Oct. 22 as fund managers’ have become less pessimistic about the price outlook.

Hedge funds’ bullish long positions outnumber bearish short ones by a ratio of 3.76:1, but that is down from 4.39 at the end of September and far below 8.68 in April, underlining fund caution.

From a fundamental perspective, the balance of price risks looks skewed towards the upside, with the potential for oil consumption to surprise on the upside next year while production growth could disappoint.

From a positioning perspective, too, the balance looks tilted to the upside, though less so than a few weeks ago, given how many shorts have already been squeezed out, especially in NYMEX WTI.

But with so much uncertainty around the global economy and the prospects for a trade truce between the United States and China, few hedge fund managers want to bet heavily on a big rally in prices yet.

John Kemp is a Reuters market analyst. The views expressed are his own.

Related columns:

- Oil price risks shift to the upside, funds continue buying (Reuters, Nov. 12)

- Hedge funds buy oil in anticipation of short-covering rally (Reuters, Nov. 4)

- U.S. refiners’ restraint cuts gasoline, diesel oversupply (Reuters, Nov. 1)2

- Hedge funds looking for the low in the oil market (Reuters, Oct. 28)

Editing by Susan Fenton

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