Hedge funds and other money managers have started to shake off the gloomy expectations of a global recession and waning oil demand growth that had seized market participants for most of the fourth quarter last year.
Over the past weeks, fund managers have run to cover a lot of short positions as OPEC’s new production cuts and U.S. sanctions on Venezuela’s oil have given a bullish push to the market.
Money managers have been lifting their combined net long position—the difference between bullish and bearish bets—in Brent Crude for most of 2019 so far.
Yet, the primary driver for the increase in the net long position was the closing of the many shorts from late 2018, rather than a renewed bullishness that oil prices will be rallying.
Bullish cues such as OPEC’s resolve to rebalance the market with another round of cuts and uncertainties about Venezuela’s oil exports have supported oil prices in recent weeks, and short-sellers have run to cover bearish bets. The flight of the bears has resulted in an increased net long position, but the market will need clearer bullish signals for the bulls to return and wager on rising oil prices, analysts say.
For the week ended January 29, fund managers raised their net long position in Brent Crude by 30 million barrels to 233 million barrels, according to data from ICE Futures Europe compiled by Reuters market analyst John Kemp.
Since early December, hedge funds have raised their net long position by a total of 96 million barrels and have increased the net long in seven out of eight weeks. However, the rise in the net long position since early December has been primarily the result of closing of the shorts, rather than a clear sign that bulls are back.
Between December 11 and January 29, short positions declined by more than 60 percent from 122 million barrels to 48 million barrels, but longs increased by only 27 million barrels, as fund managers are less bearish but surely not enthusiastically bullish on the price of oil.
Due to the U.S. government shutdown, the Commodity Futures Trading Commission (CFTC) won’t have caught up with up-to-date WTI Crude positioning data until next month.
“Speculators have continued to increase their net long in ICE Brent, having bought 29,769 lots over the last reporting week, leaving them with a net long of 232,703 lots- the largest position held since early November. As we have seen in recent weeks, the increase in the spec net long has been largely driven by short covering rather than fresh longs,” Warren Patterson, Head of Commodities Strategy at ING, said on Monday, commenting on the latest positioning report.
Short positions in Brent Crude dropped in the week to January 29 to their lowest number since late October 2018, according to ICE Futures Europe data compiled by Bloomberg.
In early October, Brent Crude and WTI Crude hit their highest levels in four years amid fears of a tight oil market going into the U.S. sanctions on Iran and the American pledge for zero Iranian oil exports. With most of the sanction threat already priced in and the United States granting waivers to the biggest Iranian buyers along with concerns that global economy is heading for a slowdown, oil market participants started to fear an oversupply, which resulted in a bear market in oil and prices plunging by 40 percent between early October and Christmas Eve.
With short covering and the realization that the Q4 sell-offs may have been excessive, oil prices booked their best January ever, gaining around 18 percent—the largest gain for that month of the year on record.
Earlier in February, oil prices hit their highest in more than two months as OPEC’s cuts, sanctions on Venezuela, and signs of slowing U.S. crude oil production with a declining U.S. rig countprovided bullish signals to market participants.
The bulls, however, may need clearer signals from the global economy to start building long positions in oil again. Signs of steady economic growth and progress in the U.S.-China trade talks could be the key drivers for bulls to come back to oil. Conversely, warning signs of economic slowdown in the world or slowdown in any key economy, as well as a failure in the trade talks and a renewed trade war, could wake up bears again.