Hedge Funds Show Signs of Oil 'Exhaustion'
Hedge fund managers have boosted their bullish positions in Brent futures and options in response to the shutdown of the Forties oil pipeline, according to an analysis of regulatory and exchange data.
But bullishness in Brent cannot completely conceal the increasing staleness of long positions in the rest of the rest of the petroleum complex, as prices fail to rise further and the end of year approaches.
Portfolio managers raised their net long position in Brent by 10 million barrels to a record 544 million barrels in the week ending on Dec. 12 (http://tmsnrt.rs/2ke0CD4).
Long positions in Brent rose by 8 million barrels, which was relatively modest given the complete outage of the Forties pipeline system, while short positions were trimmed by 1 million barrels.
But across the five major petroleum contracts as a whole, which include NYMEX and ICE WTI, U.S. gasoline, U.S. heating oil, as well as Brent, the net long position was cut by 3 million barrels.
Net long positions in WTI and gasoline were each cut by 8 million barrels with only heating oil up by 3 million barrels.
Hedge funds' net long position in gasoline has been cut by 26 million barrels or 26 percent over the last four weeks.
There has been no real increase in hedge fund positions in petroleum since the second half of November, as managers become more cautious following the big rise in prices since June.
The near-record number of long positions in petroleum has itself become a significant source of downside risk if and when hedge fund managers attempt to realise some profits.
Fund managers still hold more than eight long positions in petroleum for every short position, up from a ratio of less than 2:1 at the end of June.
In the past, such lopsided positioning has often preceded a sharp reversal in prices when hedge fund managers attempt to crystallise some of their paper gains.
Benchmark Brent prices have been essentially flat since early November, which suggests the rally may have run out of momentum, and has probably increased the risk of profit-taking.
In the circumstances, it is not surprising that portfolio managers are reluctant to add to their near-record long positions in crude and refined products.
Only the Forties pipeline outage has prevented a much bigger liquidation of hedge fund positions and likely a much larger fall in prices.
By John Kemp
