Hedge Funds

Column: Oil slump overwhelms hedge-fund short covering

LONDON (Reuters) - Hedge funds continued to sell petroleum in the middle of March but at a diminishing rate as some managers began to buy back previous short positions – anticipating a rebound that never came.

Dust blows around a crude oil pump jack and flare burning excess gas at a drill pad in the Permian Basin in Loving County, Texas, U.S. November 25, 2019. REUTERS/Angus Mordant

Hedge funds and other money managers sold the equivalent of 44 million barrels in the six most important futures and options contracts in the week to March 17 (

Total fund sales have reached 681 million barrels since Jan. 7, with a net position of just 289 million barrels remaining, according to exchange and regulatory data.

Net positions are the lowest for more than four years. They fell below this level for a few short periods between 2014 and 2016 in the last oil price slump.

But amid the continued sell-off there were signs at least some portfolio managers thought the price slump was nearing an end.

Last week, funds continued to sell Brent (-75 million barrels) and U.S. gasoline (-13 million) but were buyers of NYMEX and ICE WTI (+20 million), U.S. diesel (+16 million) and European gasoil (+12 million).

In each case, the majority of the adjustments came from a reduction in previous bearish short positions, with few, if any, new bullish long ones added.

This was the second time the hedge fund community has tried to identify a turning point. The first was in mid-to-late February, when benchmark Brent prices briefly rose from $55 to $60 per barrel before slumping again.

Like the first attempt, this one proved premature, unleashing a third wave of selling and pushing prices down even further towards $20.

The logic is sound. From a positioning perspective, the balance of risks has shifted to the upside, with prices having fallen so far already and many hedge fund managers still running short.

But positioning risks have been swamped by the continued deterioration in the global economy, which has no precedent since the Second World War, slashing fuel consumption by 10 million barrels per day or more.

Until the global economic crisis is brought under control, and some normalisation of business and transportation activity starts to take place, oil prices will continue to slump.

Related columns:

- Global economy hit by severest shock since 1930s (Reuters, March 20)

- Coronavirus confronts decision-makers with a terrible trade off (Reuters, March 18)

- Hedge funds turn ultra-bearish as volume war compounds pandemic (Reuters, March 16)

- Hedge funds paused oil sales, before coronavirus prompted second wave of selling (Reuters, March 2)

Editing by Nick Tattersall