November 5, 2018 / 1:12 PM / a month ago

Commentary: Hedge funds turn negative on oil

LONDON (Reuters) - Hedge fund managers were net sellers of petroleum-linked futures and options for a fifth week running last week as concerns about sanctions on Iran evaporated and investors refocused on economic worries.

Oil and gas tanks are seen at an oil warehouse at a port in Zhuhai, China October 22, 2018. REUTERS/Aly Song

The net long position in the six most important petroleum-linked futures and options contracts was cut by a further 73 million barrels in the week to Oct. 30.

Portfolio managers have been net sellers of 371 million barrels since the end of September, taking their net long position to the lowest level for 15 months, according to records published by regulators and exchanges.

The sharpest sell-offs last week were in Brent (-54 million barrels) and U.S. gasoline (-11 million) with smaller reductions in NYMEX and ICE WTI (-2 million), U.S. heating oil (-4 million) and European gasoil (-2 million).

Position changes are no longer confined to long liquidation. Fund managers have started to establish short positions betting on further price falls.

(Chartbook: tmsnrt.rs/2P8LQ1S)

Short positions across all six contracts have doubled over the past five weeks to 192 million barrels, the highest level for more than 10 months.

Fund managers still favour bullish long positions over bearish short ones by a ratio of almost 5:1, but the ratio has sunk from more than 12:1 only five weeks ago.

The hedge fund community’s bullish bias is the lowest for a year and positioning now looks far less stretched than it did a month ago.

With hedge fund positions concentrated in near-dated futures and options contracts, the sell-off has hit the front-end of the curve especially hard and accelerated the shift from backwardation to level or contango.

Fears about oil supplies after the return of U.S. sanctions against Iran have been replaced by concerns about slower oil demand growth in 2019.

Strong output growth from U.S. shale producers as well as Russia, Saudi Arabia, the United Arab Emirates and Kuwait should be enough to compensate for the loss of Iranian exports.

The U.S. government has also taken a more flexible approach to sanctions, backing away from earlier threats to cut Iranian exports to zero and granting waivers to many of Iran’s customers in exchange for phased reductions.

At the same time, there are growing fears about a possible deceleration in consumption growth, with oil prices falling in tandem with equity markets against the backdrop of a darkening economic outlook.

The opinions expressed here are those of the author, a columnist for Reuters. 

Related columns:

- Oil market passes cyclical peak (Reuters, Nov. 2)

- Oil prices fall as economic outlook deteriorates (Reuters, Oct. 30)

- Hedge funds cut bullish bets on oil to lowest for over a year (Reuters, Oct. 29)

Editing by David Goodman

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