Oil prices stumble as hedge funds become overextended

LONDON: Hedge fund managers added even more bullish long positions in crude oil and refined fuels last week, but positions showed signs of becoming stretched, setting prices up for a setback.

Hedge funds and other money managers were net buyers of another 46 million barrels of futures and options in the six major petroleum contracts in the week to April 23, according to exchange and regulatory data.

Funds were net buyers of Brent (+16 million barrels), NYMEX and ICE WTI (+24 million) and European gasoil (+8 million) but smaller sellers of US gasoline (-3 million) and left US heating oil positions unchanged.

Portfolio managers have been net buyers of petroleum for 15 consecutive weeks, raising their net long position by a total of 609 million barrels since Jan. 8 (https://tmsnrt.rs/2DDsTwq).

Fund buying has been remarkably consistent and persistent, with small additions to net long positions week after week, and a progressive rise in prices, without any of the usual reversals.

Nonetheless, there were signs positions were becoming stretched by April 23, so the subsequent tumble in prices should not have been surprising.

In absolute terms, fund managers had amassed a bullish net long position of more than 900 million barrels, the largest since oil prices started to slump at the start of October 2018.

Fund long positions in petroleum outnumbered short positions by a ratio approaching 9:1, nearing levels that triggered sharp price reversals in the past, most recently in October 2018 and April 2018.

Fund positioning in crude hit a ratio approaching 11:1, the most lopsided since oil prices peaked at the start of October 2018, while positioning in gasoline remained near record levels at more than 35:1.

By last week, fund managers had closed out almost all the WTI short positions they had initiated since August, leaving few left to be squeezed by rising prices, and removing an important source of support for the rally.

From a fundamental perspective, the balance of risks in the oil market is arguably still tilted towards the upside, with production problems multiplying and continued growth in consumption.

Oil production is being disrupted by tightening US sanctions on Iran and Venezuela, while Saudi Arabia is hesitating before increasing its output.

On the consumption side, uncertainty surrounds the global economic outlook, but traders are increasingly confident central banks will respond to any sign of weakness by cutting interest rates promptly and aggressively.

Still, the bullish news has been heavily anticipated, and the trade had become crowded by last week, leaving prices vulnerable to a setback when funds attempt to realise some profits and reduce their risk exposure.