July 27, 2015 / 9:41 AM / 4 years ago

REFILE-COLUMN-Hedge funds are most bearish on U.S. oil since 2010: Kemp

(Refiles to change “bullish” to “bearish” in seventh paragraph)

By John Kemp

LONDON, July 27 (Reuters) - Hedge funds are more bearish about the outlook for U.S. oil prices than at any time for almost five years, according to data from the U.S. Commodity Futures Trading Commission.

Hedge funds and other money managers had a net long position in WTI-linked futures and options equivalent to just 118 million barrels of oil on July 21, down from a recent high of 294 million barrels 11 weeks earlier (link.reuters.com/pug35w).

The net position was the smallest since September 2010. Money managers interested in oil have a long bias (there has been no net short since the current time series began in 2006). So the small net long indicates an unusually high level of bearishness among hedge funds.

Sentiment has turned bearish as a series of negative factors hit the market in quick succession, including the nuclear agreement with Iran, China’s stock market tumble, rising output from OPEC, an uptick in the number of rigs drilling for oil in the United States, and flush oil stockpiles.

Hedge funds have cut their long positions since May by just over 100 million barrels from 388 million to 281 million. On the short side of the market, money managers have added almost 70 million barrels to take their total to almost 163 million barrels.

The ratio of long to short positions, at just 1.7 to 1, is the lowest since September 2010, and has fallen from more than 4 to 1 over the last 11 weeks (link.reuters.com/naw25w).

The question is how much further oil prices will fall, with hedge funds already so heavily invested in a bearish narrative?

There is scope for hedge funds to cut their net long position even further. Gross long positions were still almost 65 million barrels above their five-year low on July 21 while gross short positions were 47 million barrels below their five-year high.

It is likely that the net long position has already fallen further, since the data refer to positions at the end of trading on July 21, and oil prices continued to fall throughout the rest of the week.

The critical question is at what point the hedge funds start to square up their short positions in order to take their profits. (Editing by William Hardy)

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