LONDON (Reuters) - (John Kemp is a Reuters market analyst. The views expressed are his own)
Hedge funds started to reduce their record bullish position in crude and refined products in the week to Nov. 21 amid growing concerns about the possibility of a sharp price reversal.
The net long position held by hedge funds and other money managers in the five main petroleum futures and options contracts covering crude and fuels were cut to 1,092 million barrels from a record 1,120 million on Nov. 14.
For Brent, WTI, U.S. gasoline and U.S. heating oil, the net long declined by 28 million barrels after rising by 237 million barrels over the previous four weeks, data from regulators and exchanges shows.
Most of the adjustments came from the long side of the market, where portfolio managers reduced the number of long positions in Brent, WTI and gasoline in a sign of profit-taking after a strong price rally.
In total, fund managers cut petroleum long positions by 26 million barrels while raising short positions by only 2 million barrels (tmsnrt.rs/2ADBuzF).
Despite the profit-taking, bullish positioning in all contracts remained close to record levels, which continued to leave the market vulnerable to a further correction.
From a fundamentals perspective, the positioning appears reasonable, given strong growth in consumption and the likelihood that OPEC will extend production cuts for a further nine months to the end of 2018 when ministers meet in Vienna this week.
But prices have already risen a long way in a short time and the hedge fund community has amassed a record number of positions that could make it hard to sustain buying momentum.
The conflict between positioning (where risks are firmly tilted to the downside) and fundamentals (where risks are more balanced or even tilted to the upside) is a source of tension within the market.
For the past two weeks that conflict has kept prices relatively steady after a fairly consistent and sustained increase since late June, but the uneasy stalemate may not last once the OPEC meeting concludes.
Oil traders have largely priced in a full nine-month extension of the current production agreement between OPEC and its non-OPEC allies, and ministers have done little to temper expectations.
Failure to extend the agreement for the full nine months could therefore spark a sharp correction, but pressing ahead will fuel concerns about the market tightening too much by the end of 2018.
“Oil prices start to fall as record bullish position makes funds wary”, Reuters, Nov. 21
“Oil prices tumble after OPEC rollover”, Reuters, May 26
“OPEC nears decision time: roll over or deepen cuts?” Reuters, May 19
Editing by David Goodman