Hedge funds are making big bets on oil going higher

Money managers have amassed close to record long positions in the six-major oil-linked futures and option contracts, and the ratio of longs to shorts is even higher than when it was when hedge fund managers held a record net long position in oil back in January, suggesting that they have never been so convinced that oil prices will increase in the short term.

In the six most important petroleum contracts, money managers held long to short positions in a ratio of nearly 14:1 for the week ended on April 20, compared to a 12:1 ratio at January 23, when portfolio managers held the record net long position in oil — 1.484 billion barrels, Reuters market analyst John Kemp writes.

For the week to April 20, money managers held a net long position of 1.411 billion barrels of Brent, NYMEX and ICE WTI, U.S. gasoline, U.S. heating oil, and European gasoil, according to regulators and exchanges data compiled by Kemp.

Funds held a total of 1.520 billion barrels of bullish positions in the six contracts on April 20, while the number of short positions dropped to the lowest in at least five years—to just 109 million barrels. To compare, fund managers held 141 million barrels in bearish positions in January, when they held the record net long position.

The extremely lopsided positioning could lead to a sharp oil price correction if and when the money managers try to close some of the open long positions, according to Kemp.

Yet there are some signs supporting the view that oil prices could rise—global oil inventories are almost down to their five-year average and demand growth is still seen robust despite the higher oil prices. A number of geopolitical concerns ranging from Venezuela's collapse to potential sanctions on Iran to possible flare-up of the conflicts in Syria and Yemen are also driving up prices.

At this point, the market participants will be looking to see if higher oil prices could start hurting demand growth, which has been strong enough to help OPEC's mission in drawing down the global oil overhang. The other supply-demand fundamental to watch would be how much new U.S. and other non-OPEC supply comes to the market with the higher oil prices.

Source: Bloomberg Pro Terminal

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