(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chartbook 1: tmsnrt.rs/2QPSxmw
* Chartbook 2: tmsnrt.rs/2QWcBDG
By John Kemp
LONDON, Nov 19 (Reuters) – Hedge fund managers have exited from all the bullish positions in crude oil and fuels they accumulated in the second half of 2017 as the bull market has unwound.
Upside price potential from Iran sanctions and prospective production cuts by OPEC is matched by downside risks from rapidly rising U.S. shale production and a deteriorating economic outlook.
Hedge funds and other money managers cut their combined net long position in the six most important petroleum futures and options contracts by a further 74 million barrels in the week to Nov. 13.
Portfolio managers have sold the equivalent of 553 million barrels of crude and fuels in the last seven weeks, the largest reduction over a comparable period since at least 2013.
Funds now hold a net long position of just 547 million barrels, less than half the recent peak of 1.1 billion at the end of September, and down from a record 1.484 billion in January.
Net length has been reduced to the lowest level since July 2017 essentially unwinding the petroleum bull market of 2017/18 (tmsnrt.rs/2QPSxmw).
Bullishness towards oil prices has evaporated and hedge funds now have the fewest outright long positions in crude and fuels since January 2016, when oil prices were hitting the bottom of the last slump.
By contrast, short positions have climbed to 261 million barrels, the highest for a year, and up from a recent low of just 96 million barrels at the end of September.
In the last five weeks, funds have sold 47 million barrels of U.S. gasoline, 31 million barrels of U.S. heating oil and 29 million barrels of European gasoil.
But the heaviest selling has been in crude, where fund managers have sold 282 million barrels of Brent in the last seven weeks and 221 million barrels of WTI in the last 10 weeks.
Fund managers still have a residual net long position of 380 million barrels in Brent and WTI, according to an analysis of exchange and regulatory data.
But most of the remaining positions appear to be long-term, passive and structural in nature rather than expressing an active view on prices.
The money manager category of positions reported by exchanges and regulators includes passive index funds and pension funds as well as more actively managed hedge funds.
Pension funds and index funds play little role in the short-term price formation process in contrast to the much more active strategies pursued by hedge fund managers.
Because of the way the data is published, there is no way to identify how many of these positions were active positions held by hedge funds and how many were more passive long-term positions held by a range of players.
But it may be possible to make a rough division between active/dynamic positions and more structural/permanent positions by a careful inspection of the data.
There appears to be a structural net long position in crude oil futures and options of around 385 million barrels in the crude oil market (“Hedge funds’ active positioning in crude oil”, Reuters, July 2017).
Fund managers have never held long positions amounting to less than 450 million barrels in Brent and WTI since 2013, or short positions amounting to less than 65 million barrels.
By subtracting structural positions from current positions, it is possible to estimate the remaining active positions held by hedge fund managers.
Following the recent wave of liquidation, fund managers have reduced their actual net long position down almost exactly in line with this long-term structural position.
Hedge funds’ active positions in crude are close to zero for the first time since July 2017 and before that August 2016 (tmsnrt.rs/2QWcBDG).
Fund managers now have an essentially neutral position on the outlook for oil prices for the first time in more than a year.
(Editing by Edmund Blair)