(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, March 23 (Reuters) - Hedge funds have turned super-bearish about U.S. oil prices as concerns about running out of storage trump the drop in the number of rigs drilling new wells.
Money managers had amassed a record number of short positions in futures and options contracts linked to WTI (West Texas Intermediate) by the end of March 17, equivalent to 209 million barrels of oil, according to the U.S. Commodity Futures Trading Commission’s (CFTC) latest commitments of traders report published on Friday.
Money managers still have long positions equivalent to 381 million barrels, so overall the sector is still running a net long position.
Hedge fund managers have a natural bullish bias. Not once have hedge funds as a whole been net short of WTI futures and options in the last nine years (link.reuters.com/daf44w).
But the ratio of long to short positions last week, at 1.8:1, was the lowest in four-and-a-half years, and among the lowest recorded since hedge fund positions have been reported separately. It was as close as the hedge fund community gets to being bearish (link.reuters.com/gaf44w).
On March 17, money managers had 90 separately identified short positions in WTI-related futures and options contracts, compared with 75 long positions, according to an analysis of CFTC data. It has been rare for short positions to outnumber long ones since oil prices crashed in 2008.
The build up of short positions comes as no surprise, though the speed at which funds have turned bearish was unexpected. Total short positions rose by 36.5 million barrels over the seven days to March 17 and have risen by 75 percent over the last four weeks.
Fund managers have focused on the immediate risk of storage space running out in the next few weeks rather than the drop in drilling activity and the implied downturn in oil production later in the year.
Stocks of crude in commercial storage at tank farms, refineries and in pipelines across the United States have risen by 73 million barrels, 19 percent, since the end of last year, and stand at the highest level since the 1930s (link.reuters.com/jaf44w).
At the same time, the number of rigs drilling for fresh oil has halved since early October 2014, to the lowest level in four years, according to Baker Hughes, the oilfield services company (link.reuters.com/maf44w).
The number of rigs drilling in North Dakota’s Bakken has dropped from 190 in October to 107 by the end of last week, according to the state Department of Mineral Resources.
Bearish hedge fund managers are betting the United States will run out of storage space before lower drilling rates start to cut production and rebalance supply and demand.
But with so many hot-money shorts in WTI-related futures and options, the uptick in futures prices between March 18 and March 20 should not surprise anyone. The market had got itself very short and was ripe for a near-term reversal. (Editing by David Evans)