Hedge Funds Turn Bullish Again Amid Political and Production-Based Volatility Risks

by Ship & Bunker News Team
Tuesday April 11, 2017

Hedge fund managers are overwhelmingly bullish about the outlook for oil prices - to the point where last week they increased their net long position in the three main Brent and WTI futures and options contracts by 54 million barrelsĀ  after five consecutive weeks of drawdowns totaling 309 million barrels, according to John Kemp, market analyst for Reuters.

Kemp added that while this long position equivalent to 696 million barrels is well below the recent peak of 951 million barrels reported on February 21, it is "far above the recent low of 422 million recorded in mid-November before OPEC's production deal" - a reference to the Organization of the Petroleum Exporting Countries' initiative to curb output and shrink the global glut.

Kemp went on to report that short positions had previously more than doubled to 241 million barrels on March 28 from 102 million on February 21, "But with prices no longer falling, and new buyers emerging, many short position owners decided to take profits, accelerating the upward move in prices."

Kemp's analysis underscores yet again the particular volatility of oil in 2017, and this concerns Geoffrey Yu, head of U.K. investment office at UBS Wealth Management, who told Bloomberg television that he sees a price volatility spillover risk, with the global reflation trade occurring "on the back of rallying commodity prices."

The question for fundamentalists is, what is the true market status for crude: surplus or scarcity?

Unfortunately, the answer isn't forthcoming: Reuters notes that the U.S. shale boom has transformed the energy sector to such a degree that "it has upended traditional supply dynamics and made forecasts far more polarized," with many investment banks insisting that huge spending cuts will lead to a supply crunch in the next few years, and Goldman Sachs countering that U.S. output and a surge of new conventional projects will create a substantial surplus by 2019.

With market influences as unpredictable as that of Libyan militias causing supply outages and U.S. president Donald Trump making a sudden about face and bombing Syria, players are increasingly looking for predictability in something that until recently was widely viewed as the very definition of unpredictability: OPEC and its shaky, highly-criticized output reduction strategy, now in its third month and still undetermined if it's making any kind of impact on fundamentals.

Last week it was reported that as far as traders are concerned, they are betting on OPEC and the extension of the cutbacks to the end of this year by selling their stakes in storage tank businesses that have profited from oversupply.

Reuters reported that Glencore, Vitol, and Gunvor have completed or have been attempting to sell parts of their holdings in storage firms since January, with Vitol's deal agreed to last October just prior to OPEC announcing it would cut output.