LONDON (Reuters) - Investor bets against the oil price are piling up at breakneck speed, the market is still buckling under the weight of excess supply for a third year in a row, but has bearish sentiment got out of hand?
The price of a barrel of oil has dropped nearly 20 percent between January and June and is closing in on its largest slide in the first half of any year in the last 20 years.
Geopolitical tensions in the Middle East, a near-2 million barrel per day cut in output by the world’s largest producers and the seasonally strong summer demand period in full swing have not been enough to rescue the price from its lowest level in seven months.
A bear market is theoretically defined by an asset price falling by 20 percent or more from a peak, a box the oil price has ticked given the drop of nearly 21 percent since the 2017 high of $58.37 struck in early January.
But nothing can fall forever and the old markets adage of “what goes down must, at some point, come up” must surely prove correct eventually.
“We’re at a peak of bearish headlines and that usually a sign that the bottom is near,” SEB commodities strategist Bjarne Schieldrop said.
Google Trends shows that queries for “oil bear market” on its Google search engine have rocketed to their highest since mid-January 2016, exactly the point at which the Brent price hit a near-13 year low of $27 a barrel before rallying.
Click reut.rs/2sHXvrB for Chart of Google searches for "oil bear market"
In the meantime, bearish, or short, bets on crude oil have exploded.
In the U.S. crude market, the short position held by money managers has doubled in just two months to the equivalent of nearly 190 million barrels, while in the Brent market, investors are sitting on a record short position of 169 million barrels.
Click reut.rs/2tcPvk2 for graphic on U.S. crude managed money short position vs weekly rig count
The Organization of the Petroleum Exporting Countries agreed in May with 11 rival producers, including Russia and Qatar, to maintain a production cut of 1.8 million bpd right into the first quarter of next year.
But there have been plenty of reasons for oil traders and investors to be gloomy.
A relentless rise in U.S. drilling activity, coupled with resurgent production from both Libya and Nigeria, OPEC members that have been excluded from the supply deal on the grounds that their output was cut by forces beyond their control, have scuppered OPEC’s efforts to force a large global overhang of crude and refined products to drain.
While the prospect of a barrage of money betting on a drop in the price may seem ominous, any open short position can potentially be closed, and bring with it a rise in the price, unlike an open long position which can trigger a drop if closed.
“When looking at (futures) data, one would certainly get the impression that care is warranted as positioning has become relatively one-sided,” JBC Energy said in a note.
Click reut.rs/2sIh835 for graphic on ICE Brent crude managed money short positions
Editing by David Evans