November 4, 2019 / 3:06 PM / 16 days ago

Column: Hedge funds buy oil in anticipation of short-covering rally

LONDON (Reuters) - Hedge funds have started to become more optimistic about the outlook for oil prices amid hopes that the United States and China will reach a trade truce and the global economy will avert recession in 2019/20.

The West Hercules drilling rig leaves Skipavika, Norway April 1, 2018. REUTERS/Gwladys Fouche/File Photo

From a fundamental perspective, hedge funds are rebuilding long positions in crude and fuels because the news flow about the economy is no longer deteriorating, even if it is not yet improving much.

From a positioning perspective, funds are anticipating that many of the futures and options sellers in late September and early October will be forced to close out their short positions as prices rise again.

The number of short positions across the six major petroleum contracts increased by almost 90 million barrels between Sept. 17 and Oct. 22 – and only 25 million barrels had been bought back by Oct. 29.

The wave of selling that pressured prices in September and early October appears to have been completed; now the hedge fund community shows signs of becoming bullish again to ride the ensuing rally.

TIME TO BUY

Hedge funds and other money managers purchased 87 million barrels in futures and options in the six most important petroleum contracts in the week to Oct. 29.

Portfolio managers have purchased a total of 109 million barrels in the three weeks since Oct. 8, according to ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

The wave of buying has partially reversed sales totalling 206 million barrels over the previous three weeks on fears about a global economic slowdown.

(Chartbook: tmsnrt.rs/2K3364n)

In the most recent week, funds were buyers of Brent (+46 million barrels), NYMEX and ICE WTI (+13 million), U.S. gasoline (+23 million) and U.S. heating oil (+7 million).

The only major contract to see net sales was European gasoil, where fund managers reduced their net long position by under 2 million barrels.

Fund managers have built a dynamic net long position of 56 million barrels across the whole petroleum complex, anticipating a further rise in prices.

The dynamic position stands in marked contrast to a dynamic net short position of 53 million barrels on Oct. 15, though it is still far below the recent peak of 420 million net long back in April.

The fund community still has plenty of capacity to increase its holdings of petroleum, especially crude, accelerating the rise in prices, if the economic outlook improves.

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

Related columns:

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

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

- Hedge funds hold fire after two weeks of heavy selling in oil (Reuters, Oct. 21)

- Hedge funds turn bearish on oil as economy slows (Reuters, Oct. 14)

Editing by Susan Fenton

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