LONDON Soaring oil prices have started to draw interest from contrarian hedge funds willing to bet the increase is a spike and not sustainable.
Hedge funds and other money managers raised their short positions in futures and options linked to U.S. crude prices (also known as WTI) by the equivalent of more than 17 million barrels in the week ending March 6, according to the Commodity Futures Trading Commission (CFTC).
It is only the third time this year money managers have boosted short positions in WTI. It was by far the largest addition to short interest for nine months, since the first week of June 2011, when hedge funds and other investors raised their short positions by the equivalent of almost 22 million barrels, in the aftermath of the May 5 flash crash.
Shorting the U.S. oil market remains strictly a minority interest. The overwhelming majority of hedge funds remain bullish, especially for WTI, given its more limited gains since the start of the year compared with Brent. Hedge fund long positions amount to nearly 326 million barrels of oil, compared with just 45 million worth of shorts, a ratio of 7:1 (Chart 1).
So far there has been little indication of significant profit-taking among the oil bulls. Long positions are down only marginally from their peak of 332 million barrels at the end of February.
But the influx of new short positions, to both CME's light sweet crude contract, and the lookalike contract offered by ICE, was significant, increasing total short interest among money managers more than 60 percent from just 28 million barrels seven days earlier (Chart 2).
Even if oil prices have become locked into a spike, as some observers have argued, hedge fund shorts are taking a brave stand, putting on an early bet against the rally before there is more evidence it has run out of steam.
But the rate of price increases does seem to have tapered off since the start of the month, for both Brent and WTI, with April WTI in particular pulling back to levels first achieved three weeks ago, which might indicate a loss of momentum and be the first sign the market is peaking.
(Editing by Keiron Henderson)