Kemp: Oil Prices Surge As Hedge Funds Reduce Short Positions

Kemp: Oil Prices Surge As Hedge Funds Reduce Short Positions
Hedge funds executed one of the fastest U-turns on record this month as managers turned from super-bearish to cautiously bullish about the outlook for oil prices.

Reuters

(John Kemp is a Reuters' market analyst. The views expressed are his own.)

LONDON, Aug 22 (Reuters) - Hedge funds executed one of the fastest U-turns on record this month as managers turned from super-bearish to cautiously bullish about the outlook for oil prices.

Hedge funds and other money managers increased their net long position in the three main Brent and WTI futures and options contracts by 118 million barrels in the week to Aug. 16.

The record one-week increase in net longs came after hedge funds had already boosted their net long position by 48 million barrels the previous week.(http://tmsnrt.rs/2bwpDFa).

Most of the adjustment has come from the short side of the market, where hedge fund managers convinced that oil prices would fall further were wrong-footed by the sudden rally. Short positions were reduced by 114 million barrels (31 percent) between Aug. 2 and Aug. 16.

The furious race to buy back short positions sent prices higher. Front-month Brent futures prices jumped from $41.50 a barrel on Aug. 2 to $49.23 on Aug. 16 and continued rising to reach $50.88 on Aug. 19 for an increase of more than 20 percent.

The recoil in short positioning was particularly violent in the WTI contract on the New York Mercantile Exchange.

Hedge funds had established a record short position of 220 million barrels in NYMEX WTI by Aug. 9, but this was followed by a record one-week 54 million barrel reduction in short positions by Aug. 16.

Fourth Cycle

Hedge funds have established a large concentration of short positions in NYMEX WTI four times since the start of 2015 (http://tmsnrt.rs/2bwpH84).

Each time the accumulation of short positions has coincided with a downtrend in WTI prices, followed by an uptrend as the short positions have been liquidated (http://tmsnrt.rs/2bwp8v4).

In this instance, the fourth short-selling cycle shifted from the accumulation phase to the liquidation phase around the middle of August (http://tmsnrt.rs/2bwro58).

Some hedge fund managers seem to have positioned themselves to take advantage of an expected short-covering rally by establishing new long positions.

Nonetheless, the speed and scale of the rally appears to have caught many traders off guard, adding to the violence of the move.

Market chatter about a possible production freeze after next month's meeting of OPEC and non-OPEC oil ministers in Algeria fuelled a recoil that would probably have happened in any event.


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Brent Crude Oil : $47.35/BBL 3.18%
Light Crude Oil : $45.93/BBL 3.25%
Natural Gas : $2.99/MMBtu 1.01%
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