While the fundamental outlook for oil appears weak, with U.S. shale drillers continuing to add extra rigs (despite the downturn in prices), Reuters' John Kemp warns that positioning data suggests the risk of a short-covering rally is increasing.
The hedge fund community placed enormous faith in OPEC’s ability to accelerate oil market rebalancing through cuts announced late in 2016 in association with key non-OPEC producers.
Fund managers accumulated a record net long position of almost 1 billion barrels by the middle of February only to suffer a sharp reversal in prices starting early the next month.
The accumulation of long positions for a second time in April was similarly rewarded with a brutal sell off in oil prices, leaving many fund managers struggling with large losses for the year.
OPEC’s decision to leave production unchanged last month, rather than cut more deeply, has sparked a third sell off, and extinguished any remaining bullishness and emboldened short sellers.
And now, hedge funds and other money managers have abandoned their previously symbiotic relationship with OPEC's 'open-mouth operations', slashing formerly bullish, buy-the-fucking-dip-on-any-OPEC-headline bets.
As Reuters Energy guru John Kemp notes, hedge fund managers cut their net long position in the three main futures and options contracts linked to Brent and WTI by 109 million barrels in the week to June 20...
Fund managers now hold just two long positions for every one short position, which ranks among the most bearish positions since oil prices started to tumble in the middle of 2014...
Kemp notes that extreme bearishness extends to refined fuels, where hedge funds have a net short position of 27 million barrels in U.S. heating oil and a near-record net short position in U.S. gasoline of 21 million barrels.
In fact, hedge funds have added short positions faster and more aggressively than during any previous short-selling cycle in the last three years...
But, as Kemp warns, the extreme pessimism across the entire petroleum complex is raising the risk of a reversal and future rise in prices (just as it did in January 2016).