LONDON, Jan 31 (Reuters) – Portfolio investors took some profits last week after a blistering rally in oil prices since the start of December left the market looking increasingly overheated in the short term.

Hedge funds and other money managers sold the equivalent of 18 million barrels in the six most important petroleum-related futures and options contracts in the week to Jan. 25.

The sales came after the fund community had purchased the equivalent of 217 million barrels over the previous five weeks and Brent prices had climbed more than $17 per barrel, or 25%, in under two months.

Most of the adjustment came from sales of previous bullish long positions (-17 million barrels) rather than initiation of new bearish shorts (+2 million) confirming it was likely driven by profit-taking.

Sales were led by NYMEX and ICE WTI (-20 million barrels) and to a lesser extent Brent (-5 million) and U.S. gasoline (-1 million), partially offset by purchases of U.S. diesel (+4 million) and European gas oil (+5 million).

Prior to the selloff, WTI appeared the most overheated part of the market, with long positions outnumbering shorts by more than 9:1 (89th percentile for all weeks since 2013) compared with less than 5:1 for Brent (51st percentile).

Profit-taking was small-scale, and investors are still overwhelmingly bullish towards oil, with a net long position of 743 million barrels across all six contracts (67th percentile) and long positions outnumbering shorts by 6:1 (79th percentile).

Global petroleum inventories are below the pre-pandemic five-year average and expected to tighten further as the economy continues to recover from the pandemic-linked recession and international passenger aviation resumes.

Six-month backwardations in both Brent and WTI futures are among the most severe for a third of a century, consistent with traders expecting low and falling inventories.

However, with prices and spreads having risen so much in such a short space of time, and concerns about inflation clouding the economic outlook, at least some fund managers decided to realise some profits.

(John Kemp is a Reuters market analyst. The views expressed are his own.)