Hedge Funds Bullish on Brent, not WTI: Kemp

Hedge funds are turning more positive about the outlook for crude oil prices, according to the latest positioning data from regulators and exchanges.

Hedge funds and other money managers held a combined net long position in the three main crude oil futures and options contracts amounting to 383 million barrels on Feb. 23.

The combined net long position has increased in eight of the last 11 weeks from a recent low of 230 million barrels on Dec. 8. (http://tmsnrt.rs/1XUWJih)

But the increase in hedge fund and other money manager net long positions has been concentrated in Brent rather than WTI. (http://tmsnrt.rs/1XUWS5i)

The net long position in Brent futures and options traded on ICE Futures has jumped by more than 100 million barrels to 320 million barrels from 183 million barrels. (http://tmsnrt.rs/1XUWQKH)

The net long position in WTI futures and options traded on ICE and the New York Mercantile Exchange has risen less than 20 million barrels to 63 million barrels from 47 million barrels. (http://tmsnrt.rs/1XUWVy1)

Extreme pessimism about the near-term outlook for prices, which reached its height in December and early January, seems to have dissipated a little.

There is more confidence that the long-awaited rebalancing of supply and demand is now underway in earnest which could help stabilise stockpiles and prices later in 2016.

U.S. shale producers seem to be finally cracking under the strain from low prices, with more than 100 oil drilling rigs idled over the past month, and many producers now openly talking about producing less in 2016.

At the same time, U.S. road traffic volumes and gasoline demand have continued to grow rapidly, according to the most recent weekly and monthly data.

But hedge funds and money managers have displayed a strong bias for going long through Brent rather than WTI.

There are concerns about the availability of adequate onshore crude oil storage in the United States especially around the trading hub at Cushing.

Reflecting those concerns, WTI futures contracts are trading in much steeper contango than Brent for nearby months.

The contango makes it much cheaper to run a long position in Brent (where the cost of rolling a long position forward is lower) than in WTI.

The contango from April to July is just $1.33 per barrel for Brent while the contango for WTI over the same period is $4.00.

By John Kemp