By John Kemp
LONDON Feb 14 Is the oil market heading
for a repeat of last year: a big run up in prices during the
first few months followed by a sudden crash when the inflows of
investment money dry up and early entrants try to realise their
There are eerie parallels. Like last year, strongly
accommodative central bank policy from the Federal Reserve and
signs of recovering economic activity in North America and
Western Europe are coupling with physical supply disruptions to
encourage a more bullish outlook for oil.
In 2011, it was Libya and Fukushima, combined with the Fed's
second-round of large-scale asset purchases (QE2). This year it
is Sudan and tensions around Iran, while the Fed indicates
interest rates are set to remain low through 2014.
The potent cocktail of recovering demand with continuing
supply disruptions has turned investors bullish for the first
time in over six months.
Hedge funds and other money managers are now running more
than six times as many long positions in U.S. crude futures and
options (287 million barrels) as short ones (45 million
The ratio of long to short positions has doubled since
October and is more stretched than any time since May 31, 2011,
when funds were still liquidating long positions after the flash
crash on May 5. ()
There are some important differences between the current
market position and the corresponding point last year.
The big imbalance between funds' long and short positions is
not apparent in the Brent market, where commitment of traders
data published by Intercontinental Exchange shows funds running
a long/short ratio of 3:1.
Much of the net length in the U.S. crude market comes from
the absence of short positions, which have shrunk more than
half, from around 90 million barrels in October to 45 million
barrels in the week ending February 7, according to commitments
of traders data published by the U.S. Commodity Futures Trading
Money managers' combined long positions total just 288
million barrels, up just 20 million or so since October, and far
below the peak of 350-400 million barrels in first half of 2011.
If last year's commitment of 350-400 million barrels
indicates how much money investors could potentially commit to a
convincing bull market, there are still of funds on the
sidelines that could come into the market and lift prices
It may though need more convincing evidence of a sustained
increase in oil demand or actual disruptions, not just threats,
to Gulf supplies to draw in the next wave of investment money.
Despite the differences, it would be dangerous to take too
much comfort from the fact the large net long position in U.S.
crude currently comes from the absence of shorts rather than an
overhang of long positions. Short positions provide stability
because they represent a pool of willing buyers when prices dip.
Sharp movements in prices are often preceded by a big
imbalance in long and short interest. In this instance, there
may not be much short buying interest below the market at
current levels to stabilise prices if the rally falters.
Many hedge funds and other money managers couple positions
in U.S. crude with contrary positions in Brent to trade the
spread and a comparative view on supply and bottlenecks. It
seems likely at least some of the long positions in U.S. crude
are twinned with short positions in Brent as funds bet on
So if there is increasing fragility in the U.S. crude
market, it could be expressed as a sharp widening of the
Brent-WTI spread, a decline in outright WTI and Brent prices, or
some combination of the two.
But the heavy imbalance in U.S. crude positioning suggests
that one way or another the market is increasingly being set up
for a sharp move.