April 10, 2018 / 9:33 AM / 8 months ago

Commentary: Hedge funds rotate from WTI to Brent in search for roll yield

LONDON (Reuters) - Hedge funds trimmed their bullish position in crude oil and fuels in the most recent week after increasing it significantly over the previous fortnight.

A general view of the oil refinery in Mongstad, Norway April 1, 2018. REUTERS/Gwladys Fouche

But the overall reduction conceals a sharp shift away from U.S. light crude (WTI) and towards the international marker Brent, according to an analysis of position data published by regulators and exchanges.

Hedge funds and other money managers cut their net long position in the six most important futures and options contracts linked to petroleum by 43 million barrels in the week to April 3.

Portfolio managers cut their net long position in WTI (NYMEX and ICE) by 48 million barrels while trimming their net long in Brent by just 4 million barrels.

(Chartbook: tmsnrt.rs/2GPRVs8)

The fall in WTI net length was the largest one-week reduction since the end of August, when hurricanes disrupted the U.S. refining system, and continues a trend evident in recent weeks.

Funds have been steadily cutting their exposure to WTI over the last two months while maintaining a strong bullish position in Brent.

The net long position in WTI has fallen by 105 million barrels since it peaked on Jan. 23 even as the net position in Brent has risen by an extra 27 million barrels over the same period.

The result is that the position in Brent now looks exceptionally stretched while positioning in WTI looks far less lopsided.

Fund managers now hold almost 21 long positions in Brent for every short position, a record imbalance, up from a ratio of 11:1 on Jan. 23.

By contrast, funds hold fewer than nine long positions in WTI for every short, down from a ratio of almost 12:1 in late January.

The shift in relative positioning between WTI and Brent mirrors the changing calendar spreads at the front end of the futures curve.

The front-month calendar spread in WTI has gradually eased from backwardation towards contango since the start of February.

Crude stocks have been increasing around the WTI delivery point at Cushing and there are reports of spreading pipeline bottlenecks throughout the West Texas/Permian region.

By contrast, Brent calendar spreads have remained firmly in backwardation, and recently tightened again after softening during much of the last three months.

Hedge funds are being drawn from WTI towards Brent in the search for roll yield (long positions have a positive yield in a backwardated market but cost money to maintain in a contango market).

With oil prices having been basically flat since December, roll yield is becoming increasingly important to portfolio managers.

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

Related columns:

Hedge fund oil bulls play down macro risks

Oil market ‘locked’, almost all funds expect further price rises

Funds trim bullish oil positions, but no rush for exit

Editing by Dale Hudson

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