Short-selling is rearing its head in the oil market again.
After bullish bets on Brent crude hit a record and futures surged to two-year highs, hedge funds are pulling back with a sense that the rally has reached its limit for now.
Wagers on lower prices rose by the most since June as Middle East tensions took a backseat, while uncertainty looms over Saudi Arabia’s push to extend OPEC’s output curbs this month.
“We’re at levels where the market appears to have crested,” Stamford, Connecticut-based Tradition Energy market research manager Gene McGillian said. “Continuing to see supply drawdowns is probably what the next leg of the rally will be predicated on.”
Doubts over Russia’s willingness to go along with the Saudi Arabians, record production from the US’ prolific shale fields and a worse outlook for demand from the International Energy Agency helped snap oil’s longest streak of weekly gains in a year.
At the same time, concern over heightened geopolitical risks in the Middle East seems to have subsided, at least for now, said Rob Haworth, who helps oversee about US$150 billion in assets at US Bank Wealth Management in Seattle.
“We haven’t seen more conflict,” Haworth said. “For prices to get a lot higher, you have to see a meaningful increase in disruptions — and we haven’t.”
Hedge funds lowered their Brent crude net-long position — the difference between bets on a price increase and wagers on a drop — by 1 percent to 537,557 contracts in the week ended on Tuesday last week, according to data from ICE Futures Europe.
Shorts surged 8.7 percent, while longs fell 0.1 percent.
Meanwhile, the net-bullish position on West Texas Intermediate crude, the US benchmark, rose 10 percent to 349,712 contracts over the same period, according to the Commodity Futures Trading Commission.
The net-long position on benchmark US gasoline rose 11 percent, while diesel net-longs rose 3.3 percent.
However, that optimism might be fading, too.
West Texas Intermediate also fell from its highs, with US crude oil stockpiles rising by more than 4 million barrels in the past two weeks.
Plus, there are real risks that OPEC might not be able to effectively extend cuts and that would add to the overhang spurred by the US shale surge, Haworth said.
“It’s hard for me to make a case that we’re creating a new higher trading range,” he said. “We’re still staying cautious here.”
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