LONDON – Hedge funds trimmed bearish positions in crude oil last week after Saudi Arabia threatened to punish short sellers and on signs that prices had found a floor after recent weakness.
Hedge funds and other money managers purchased the equivalent of 40 million barrels in the six most important petroleum futures and options contracts in the week to Sept. 22.
Purchases occurred at the fastest rate since late April, according to position records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.
But buying was concentrated in crude rather than refined products, and involved buying back previous short positions rather than opening new long ones.
Portfolio managers purchased mainly Brent (+23 million barrels) and NYMEX and ICE WTI (+18 million), with smaller purchases in U.S. gasoline (+2 million) and European gasoil (+3 million) and sales of U.S. diesel (-5 million).
On the crude side, funds repurchased 37 million barrels of previous short sales while opening just 3 million barrels of new bullish long positions.
Across all six petroleum contracts, total short positions fell to 340 million barrels, from a two-year high of 379 million the week before, but still up from 223 million a month ago (tmsnrt.rs/339TpLq).
The pattern is consistent with funds becoming less bearish rather than more bullish, de-risking their portfolios rather than adding more price exposure.
It came after Saudi Arabia’s oil minister threatened to leave short sellers “ouching” a few days earlier, and amid signs oil prices were stabilising after the recent sell-off, despite a drumbeat of negative economic news.
Calendar spreads for both physical Brent and Brent futures have also rebounded modestly after previous weakness, indicating traders see a more balanced market in the next few months.
Before last week’s short-covering, the market was starting to look stretched, like a piece of elastic under tension, with short positions high, and the ratio of long to short positions unusually low.
In recent years, the concentration of hedge fund positions on one side of the market has usually heralded an imminent turning point in the price trend.
Hedge fund selling was already decelerating before the Saudi oil minister issued his threat, in a sign the balance of risks was shifting.
Once concerns about the global economy and oil consumption failed to push prices even lower, the market was primed for a bout of short covering, propelling prices modestly higher, and recovering some of their earlier losses.
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