Oil report

COLUMN-Hedge funds turn attention to oil storage: Kemp

(John Kemp is a Reuters market analyst. The views expressed are his own)

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By John Kemp

LONDON, Feb 22 (Reuters) - Hedge funds have taken an increasingly nuanced position on oil prices since the start of the year, becoming more bearish towards U.S. crude but bullish towards Brent.

The latest data from the U.S. Commodity Futures Trading Commission and exchanges show hedge funds and other money managers running near record long and short positions in oil derivatives.

Hedge funds are running combined long positions of 688 million barrels in the three main WTI and Brent contracts on ICE and NYMEX, just 3 percent below the record of 711 million barrels.

At the same time, hedge funds are also running combined short positions in WTI and Brent amounting to 348 million barrels, which is 11 percent below the record of 392 million barrels (

Money managers have maintained a net long position in crude oil futures and options throughout the oil boom and the subsequent slump indicating that a clear long-bias in the sector.

Since oil prices started to slide in June 2014 the most variable and dynamic positions have been on the short side of the market, especially in WTI.

The accumulation and liquidation of short positions in WTI has correlated closely with the rise and fall in U.S. oil prices (

The long side of the market has appeared less dynamic and there has been little change in gross long positions despite the occasional increase but mostly decline in prices.

But since the turn of the year, the long side of the market has shown the biggest change, with long positions increasing by more than 100 million barrels (and at one point by more than 120 million barrels).

The simplest interpretation is that the hedge fund community’s views on the future direction of oil prices are increasingly divided.

Bears believe prices still have further to fall to force producers to stop drilling and shut in existing wells while bulls increasingly believe the bottom is in and the market is set for a rebound (even if it is limited).

But a more complex picture emerges when the managed money positions in WTI and Brent are considered separately (

Hedge funds have become progressively more bearish towards WTI prices, with limited long positions and near record short positions (

The overall position in WTI remains net long, but only just, with long positions exceeding shorts by only 55 million barrels, one of the smallest margins on record.

By contrast, hedge funds have become progressively more bullish towards Brent, with near record long positions and only a modest number of shorts (

The net long position in Brent futures and options, currently 285 million barrels, is very close to the highest level ever recorded.

The term structure of the two contracts is also very different, with WTI trading in a much deeper contango than Brent (

The structure of WTI prices appears to reflect growing fears about onshore storage space running out in the United States.

The deeper contango in WTI also means short positions in U.S. crude can be rolled forward more profitably than in Brent.

Because of the way the data are compiled and published we cannot identify whether some hedge funds are both running short WTI and long Brent, running a cross-contract spread position, but it seems very likely.

Hedge funds no longer seem to have such a strong directional view on prices, either bullish or bearish, but seem more focused on price dynamics linked to the availability of storage.