Hedge funds sell oil as ratio to gold narrows

By Jeremy Gaunt - Analysis

LONDON (Reuters) - The tumble in the price of oil over the past few weeks may have been exacerbated by hedge funds deciding that it was just too expensive, particularly in relation to gold.

While much of the fall has been put down to an assumption that demand will fall with the slowdown in leading economies, hedge fund specialists say there are also less fundamental reasons behind the move.

Oil's sharp rise this year -- New York crude had gained as much as 53 percent to a record high above $147 a barrel earlier in July -- has not been matched by gold, which was up just 18 percent on the same period.

That makes oil very expensive by historical standards even beyond its record face value.

"There is a very long-term relationship between gold and oil," said Will Bartleet, a fund manager at HSBC's Absolute Returns Service.

One aspect of the relationship is that the price of a barrel of oil is seen by some to be in equilibrium with gold when it is at a ratio of 10 barrels to one ounce.

This was roughly the case in mid-March when gold hit a record above $1,030 an ounce and oil was trading at around $105 a barrel. It was at a slightly tighter 8.7 to 1 ratio at the end of 2007 with oil at $96 and gold at $833 before gold took off.

Since March, however, gold has come down and traded in a relatively narrow range while oil has soared.

The result: The ratio was just 5.9 to 1 earlier this month.

SHORTING OIL

There is evidence that hedge funds noticed this trend, or at least decided that the time had come to get out of the long oil trade they have held for some time.

Hedge funds sold crude oil in the week to July 22 to take a small overall short position for the first time since February 2007, according to the Commodity Futures Trading Commission.

This gelled with Societe Generale's latest analysis of CFTC data which found hedge funds unwinding their net buying positions in oil at the end of June and heading towards being neutral or net sellers.

At the same time, SocGen found hedge funds to be strong buyers of gold -- up at May levels and not far from those seen earlier in the year in the run up to March.

Since its $147 peak on July 11, oil has fallen as much as 17 percent. It was around $123 a barrel on Monday.