Kemp: Hedge Fund Short Positions And Oil Prices In 2015
John Kemp is a Reuters market analyst. The views expressed are his own
LONDON, Nov 24 (Reuters) - U.S. oil prices have cycled between $40 and $60 per barrel since the start of 2015 and the rise and fall has corresponded with the accumulation and liquidation of hedge fund short positions.
There have been at least three cycles in WTI prices and hedge fund positions in the main NYMEX light sweet crude contract since the turn of the year.
The first cycle began at the start of the year and was completed by mid-May.
Money managers increased their short position from 74 million barrels at the start of January to a peak of 178 million barrels on March 17 before reducing it to 53 million by May 12. Front-month WTI prices fell from $48 to a low of $43 in the middle of March before rebounding to around $60 in mid-May.
The second cycle began in mid-May and lasted until the middle of October.
Hedge funds increased their short positions from 53 million to 163 million in mid-August before cutting it to 90 million by mid-Oct. WTI prices swooned from nearly $60 to a low of $39 in late August before recovering to almost $50 in early October.
The third cycle began in late October and appears to be unfinished.
Hedge funds boosted short positions from 90 million to 154 million on November 17. Prices dropped from $47 to around $40 though they have since recovered slightly.
The attached charts show the correspondence between the accumulation and liquidation of hedge fund short positions, as reported by the U.S. Commodity Futures Trading Commission, and NYMEX WTI prices since the start of 2015 (http://tmsnrt.rs/1QFJ91i).
Low prices have generally coincided with large short positions held by the hedge funds, while high prices have occurred when hedge fund short positions have been smallest.
Turning from absolute levels to changes, oil prices have tended to fall while hedge funds were adding to short positions, and to rise when hedge funds were cutting them.
It is impossible to say for certain whether the accumulation and liquidation of hedge fund positions is causing the rise and fall in WTI prices, or whether both prices and positions are responding to external fundamentals.
But if hedge funds were trading based on a forward-looking view of the market or prices reverting to the mean, short positions would have been greater when prices were higher (and had more scope to fall) and smaller when prices were lower (and therefore had less room to fall further).
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