Hedge Funds Won Big On OPEC Spat

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By Tsvetana Paraskova Money managers continue to take profits on oil futures and options contracts after crude prices hit multi-year highs in early July. Hedge funds and other portfolio managers were net buyers of the most traded petroleum contracts in the latest reporting week, but most of the purchases consisted of buying back to close out short positions at a profit. Overall, money managers bought the equivalent of 24 million barrels worth of petroleum contracts in the week to July 13, according to estimates of Reuters market analyst John Kemp, based on data from exchanges. Although the latest reporting week saw net buying of petroleum contracts, two-thirds of the buying was focused on repurchasing of previously open short positions, and just one-third was opening of new long positions, Kemp’s calculations show. Money managers thus continued to take profit in the petroleum trading complex, after oil prices hit the highest in years, with WTI Crude the highest since November 2014, immediately after OPEC+ failed on July 5 to agree on its future oil supply policy. Oil prices pulled back from those highs as early as the following day, also because hedge funds started taking profits as the positioning in the market began to look too bullish. At the same time, market participants continued to believe that OPEC+ will eventually reach some compromise (as it did this past Sunday) and add more supply, while concerns about the Delta variant of COVID surging in many countries also killed some of the bullish sentiment. -taking, which began with the week to July 6, continued in the following week to July 13, amid a volatile market and generally falling prices while OPEC+ was perfecting the art of “consensus-building”, as Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, described the two-week-long negotiations. The market was ripe for some profit-taking after oil prices ran too high, with the U.S. benchmark hitting $75 a barrel ahead of the first OPEC+ meeting on July 1. Too many traders and speculators had expected prices to continue to rise amid strong demand and a cautious OPEC+ approach toward releasing more supply. When the long trade became overcrowded, some money managers opted to sell part of their existing long positions and/or closeout previously open short ones. The slide in oil prices in recent days was, to some extent, due to the hedge funds’ profit-taking activity, as well as to OPEC+ now definitely adding more oil supply at a time when concerns about the Delta variant are making market participants jittery about the trend in oil demand recovery. On Monday, a day after OPEC+ announced an agreement about oil supply and the oil pact until the end of 2022, oil prices crashed by 8 percent, the biggest one-day plunge since September 2020. Brent slipped below $70 a barrel while the WTI slide stopped at $66 per barrel. Closing of longs and short-covering contributed to the slide, in addition to the prospect of more supply each month while the Delta variant sparks concern about fuel demand globally. Analysts also point out that during a summer lull in markets, amid lower than typical liquidity, volatility is bound to be higher, with one piece of bullish or bearish news affecting an asset class more than it would have if it weren’t for the holiday period. Nonetheless, analysts see the OPEC+ deal as constructive for the market, as it reassured participants there would not be a repeat of last year’s brief price war, which contributed to the historic crash of U.S. oil plunging into negative territory. Meanwhile, money managers used the two-week-long OPEC+ uncertainty to take profits after oil prices hit multi-year highs.

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