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(Repeat April 15 column without change John Kemp is a Reuters Market Analyst.) The opinions expressed are his.)
* Book of cards: tmsnrt.rs/2VPrFFO
By John Kemp
LONDON, April 15 (Reuters) – Hedge fund managers continue to accumulate positions on crude and gasoline in the strongest bull market since 2017, but the market is starting to look tense and the balance risks are reversed.
Hedge funds and other portfolio managers increased their long net position by 503 million barrels in the six largest oil futures and contracts over the last 13 weeks.
Fund managers have added 294 million barrels of long bullish positions since January 15, while reducing 215 million barrels of short bearish positions since January 8, according to market and regulatory data released Friday.
The long bullish positions now exceed the short bearish positions of a ratio approaching 7: 1, compared with less than 2: 1 early January (tmsnrt.rs/2VPrFFO).
Since 2015, the accumulation of a large long or short concentrated position has often marked an imminent shift in oil price developments.
At the beginning of January, the large number of short positions on hedge funds indicated an impending rise in prices since the lows of the end of last year, fund managers having covered short positions.
In April, however, the long-term focused positioning began to indicate a likely reversal of the rally, or at least a pause, if fund managers were trying to make a profit.
The largest positioning imbalances are concentrated in crude gasoline and American gasoline; there is no sign of a similar imbalance in middle distillates such as fuel oil and European diesel.
GROSS AND ESSENCE
The portfolio managers increased their combined net long position on Brent and WTI over 11 of the last 13 weeks, for a total of 397 million barrels.
Long positions on Brent and WTI outnumbered short positions in a ratio of almost 8: 1, compared with less than 2: 1 at the beginning of January.
In addition, the funds increased their long net position on US gasoline over the past nine weeks out of a total of 58 million barrels.
Long positions outnumbered short positions by more than 26: 1, compared with 2: 1 at the end of January, one of the biggest imbalances ever recorded.
The long bullish positions on gasoline and crude remain below record levels set earlier in 2018, so fund managers still have the opportunity to increase their long positions.
But most short positions on crude and gasoline initiated in the fourth quarter have been liquidated, removing a major source of purchase.
From a fundamental point of view, the balance of risks always seems to be trending upwards, the global economy avoiding the recession, the persistent supply failures in Venezuela and in Iran and the production restrictions of Saudi Arabia.
From a positioning point of view, however, the balance is different. The long-short ratios that marked a rebound in January now imply that the balance of risks has begun to fall.
If funds continue to increase their long positions, the risk of a future price reversal will only increase.
Related columns:
– Oil traders welcome downsizing but worried about economic outlook (Reuters, April 8)
– Oil traders await the badessment of IMO's regulations (Reuters, March 27)
– Fed attacks at the signs of a slowdown in the economy (Reuters, March 22, 2008)
– Saudi Arabia resumes its usual role as an alternative producer (Reuters, February 20) (Edited by David Evans)
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