Petroleum markets were hit by a heavy bout of profit-taking in the second week of February as hedge funds liquidated some of the record long positions they accumulated over the previous seven months.
Hedge funds and other money managers cut their combined net long position in the six most important petroleum futures and options contracts by the equivalent of 152 million barrels in the week to Feb. 13.
Fund managers have now cut the combined net long position in Brent, NYMEX and ICE, U.S. gasoline, U.S. heating oil and European gasoil by a total of 215 million barrels over the three most recent weeks.
Even so, the combined net long position is still 959 million barrels higher than at the end of June 2017, when fund managers began to turn bullish (http://tmsnrt.rs/2BCCBz1).
The most recent week saw large reductions in net long positions in Brent (-32 million barrels) and WTI (-31 million barrels).
But in proportionate terms, there were even larger reductions in European gasoil (-38 million barrels), U.S. heating oil (-32 million barrels) and U.S. gasoline (-20 million barrels).
Refined fuels accounted for 25 percent of hedge fund managers' net long position in the petroleum complex but almost 60 percent of the liquidation in the week to Feb. 13.
The reduction in net long positions across the complex was the largest pull for nine months, according to position records published by exchanges and regulators.
In every contract, the liquidation of long positions far outstripped the creation of new short ones, indicating fund managers were realizing some profits after the strong rally in oil prices, rather than turning outright bearish.
Portfolio managers' positioning remains very lopsided across the complex, with longs outnumbering shorts by a ratio of more than 10:1, down from almost 12:1 at the end of January, but still exceptionally high.
The near-record imbalance remains a significant source of downside risk and could lead to a further sharp drop in oil prices if anything triggers further profit-taking.
Fund managers still hold more than 1,400 million barrels of long positions in petroleum futures and options, a scale that was unprecedented until two months ago.
There are fewer than 140 million barrels of hedge fund short positions, which is close to the lowest level since prices started falling in 2014, and means there will be little support from short-covering should prices fall.
But the fundamental backdrop remains strong, with oil consumption growing rapidly, reported inventories declining and OPEC signaling production cuts will be extended through the end of 2018.
Strong fundamentals have discouraged aggressive short-selling and convinced many fund managers to retain (most of) their existing long positions despite the recent pull back in crude prices.
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