(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
Hedge fund managers were busy reducing bullish positions in petroleum well before OPEC and its allies indicated in the middle of last week that they would consider relaxing output curbs.
Hedge funds and other money managers reduced their net long position in the six major petroleum futures and options contracts in each of the five weeks to May 22 by a total of 108 million barrels.
The reduction has been concentrated in crude, where net long positions in Brent and WTI were cut by 169 million barrels over those five weeks.
Liquidation was heaviest in Brent (-131 million barrels over six weeks) rather than NYMEX and ICE WTI (-51 million barrels over four weeks).
It was partly offset by increased net length in fuels, especially U.S. gasoline (34 million barrels), with smaller increases in U.S. heating oil (+26 million barrels) and European gasoil (+2 million barrels).
Liquidation hit near-term Brent futures prices particularly hard, since most hedge fund positions are held in contracts just a few months from expiry, which has helped push near-term contract prices into contango.
Portfolio managers cut their net long position in Brent by almost 50 million barrels in the week to May 22, the largest one-week reduction since before the rally started in June 2017.
Hedge funds have continued to add bullish positions in fuels, especially gasoline, in a bet consumption will remain relatively strong.
But the decision to pare positions in crude points to deeper unease about the sustainability of the rally in oil prices over the last 10 months.
Hedge funds started to reduce their net long position in petroleum around the time U.S. President Donald Trump used Twitter on April 20 to blame OPEC for pushing up oil prices.
FOLLOW THE MONEY
For all the bullish commentary around oil prices in recent weeks, hedge fund managers have used rising prices to realize some profits rather than increase their positions.
Hedge fund positioning in the petroleum complex had become exceptionally stretched, with long positions outnumbering short ones by a record ratio of 14:1 by April 17.
Positioning was even more lopsided in Brent, where portfolio managers held more than 20 long positions for every short one, according to exchange and regulatory data.
Since then, however, fund managers have cut long positions across the petroleum complex by 52 million barrels and boosted shorts by 57 million barrels.
The number of shorts has risen from just 109 million barrels to 166 million barrels, the highest for five months since the middle of December.
Positioning is still stretched, but much less so than before, with long positions now outnumbering shorts by 9:1 in petroleum and 7:1 in Brent.
Large concentrations of hedge fund positions have normally preceded a sharp reversal in the price trend over the last four years.
Recent sharp falls in oil prices, especially Brent, are therefore not surprising, given that fund managers have been steadily liquidating long positions and adding shorts for more than a month.
Comments from senior OPEC and non-OPEC officials suggesting they would consider raising output to compensate for lost production from Venezuela and sanctions on Iran catalyzed a sharp fall in oil prices.
But the market had been primed for a sharp correction given steady hedge fund selling over the last five weeks.
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