Hedge Funds' Active Positioning in Crude Oil: Kemp
Hedge funds are some of the most important and dynamic participants in the oil market but public information on their positions and behaviour is severely limited.
The only comprehensive information on hedge fund positions that is regularly available is contained within the commitments of traders reports published by regulators and exchanges.
Hedge fund positions are co-mingled with pension funds, commodity trading advisers and other firms that manage or conduct trading on behalf of clients in the “money managers” category.
The managed money category embraces a wide range of trading styles, some very active and likely to play an important role in short-term price discovery, and others which are essentially more passive and long-term.
Money managers held long positions across the three major futures and options contracts linked to Brent and WTI totalling 771 million barrels on July 18, according to exchange and regulatory data.
They also held 271 million barrels of short positions, giving them an overall net long position of 500 million barrels (http://tmsnrt.rs/2h5ayzx).
Because of the way the data is published, there is no way to identify how many of these positions were active positions held by hedge funds and how many were more passive long-term positions held by a range of players.
But it may be possible to make a rough division between active/dynamic positions and more structural/permanent positions by a careful inspection of the data.
Since March 2013, the number of managed money long positions has peaked at 1,054 million barrels, but never dropped below 452 million, even in the depths of the oil price slump.
Similarly, the number of short positions has ranged as high as 392 million barrels, but never fallen below 70 million, even when the sector was at its most bullish in May 2014.
These minimum long and short positions in the money manager category appear to be semi-permanent or structural in nature (http://tmsnrt.rs/2eQhq35).
Because these positions appear invariant to prices, and everything else, they probably play a limited or no role in the price formation process.
Excluding these structural long and short positions from the total provides a clearer insight into the remaining, more dynamic positions.
From the published commitments of traders' data, there is no way to identify the owners of these active positions, but most are likely to be attributable to hedge funds or commodity trading advisers of various styles (fundamental, technical and quantitative).
Total money manager positions have always been net long since at least March 2013, suggesting a persistent bullish bias.
But if the structural positions are excluded, money managers have cycled between net long and net short positions (http://tmsnrt.rs/2h5Gsfi).
And the cycling in money managers’ positions has roughly corresponded with the short-term rise and fall in oil prices (http://tmsnrt.rs/2eQb43H).
Focusing purely on the dynamic element of money manager positioning reveals the exceptional accumulation of long positions between December 2016 and February 2017.
The active position went from a very small net long of 40 million barrels on Nov. 15, essentially neutral, to a super-bullish record net long position of 569 million barrels by Feb. 27.
The accumulation of long positions and reduction in shorts shows a degree of bullishness that was unparalleled, at least in recent years.
But if the build up in the long position was exceptionally large, the associated rise in oil prices was unusually modest, which suggests money manager buyers found plenty of very eager sellers.
Money managers likely funded the hedging programmes of U.S. shale producers, who then increased their drilling programmes, tanked oil prices and left the money managers holding the losses.
The subsequent liquidation of the entire record net long position between February and the end of June was also accompanied by a relatively modest decline in prices, indicating that liquidity remained good throughout.
By the end of June, money managers held a small active net short position of 25 million barrels, amid mounting concerns about the pace of U.S. shale drilling and OPEC’s limited progress in cutting stockpiles.
In the following three weeks, money managers have turned their active position into a net long of 118 million barrels, mostly by cutting bearish short bets, accompanied again by a modest rise in prices.
By John Kemp
