Funds News

Tight credit driving shorts out of oil market - GS

NEW YORK, July 1 (Reuters) - Tighter credit conditions are forcing leveraged speculators and oil producers with weak credit to close out short positions in crude oil futures, Goldman Sachs said in a research note Tuesday.

Open interest in New York Mercantile Exchange light sweet crude oil futures CLc1 has been declining since the third quarter of 2007, a phenomenon Goldman says is likely due to the credit squeeze that began to grip global markets at that time.

“The short side of the market has a greater need to cover in response to deleveraging and decreasing credit terms,” wrote a Goldman team led by Giovanni Serio and Jeffery Currie.

Open interest in the NYMEX light sweet crude contract fell to a 15-month low last week at 1.3 million contracts, according to Reuters EcoWin.

The credit crunch may be further skewing the oil market toward the upside by preventing some cash-strapped long players from liquidating positions as many are likely using substantial gains in oil as collateral for other investments, Goldman said.

A similar phenomenon is occurring on the physical side of the market, where weaker oil refiners are being forced to cut inventories due to the high cost of credit, Goldman said.

Independent refiner Tesoro Corp TSO.N said last week it would cut its inventories by 10 percent in an effort to reduce working capital requirements and cut borrowing. (Reporting by Robert Campbell; Editing by Walter Bagley)