Oil Sure Catches Hedge Funds Wrong Footed

Oil’s sharp rally since the middle of March has been driven by a race among bearish hedge funds to cover loss-making short positions rather than any great bullishness about the outlook.

On the eve of the rally, hedge funds and other money managers had amassed record short positions in WTI-linked futures and options amounting to 209 million barrels of oil.

But in the seven weeks between March 17 and May 5, hedge funds cut their shorts by almost 116 million barrels to 93 million, a decline of more than 55 percent.

Over the same period, hedge funds added only 7 million barrels of net new longs, a 2 percent increase from 381 million to 388 million, according to the U.S. Commodity Futures Trading Commission (CFTC).

Hedge fund short covering coincides almost precisely with the rise in front-month WTI prices, from a recent low of $42 per barrel on March 18 to a high of more than $62.50 on May 6, an increase of nearly 50 percent.

The spread between the price of WTI delivered in June and December 2015 has halved from $6.16 to $3.08 between the same dates, and since tightened further to just $2.71.

Now the record short has been largely squared up, the rally has faded, as there are fewer short positions to buy back.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza