Hedge Funds Reduced Short Oil Positions Early Last Week

Hedge funds had covered only a small part of their record short position in crude oil by early last week, but it was still enough to send prices surging more than $6 higher over the course of Thursday and Friday.

Hedge funds reduced their combined short positions in the main Brent and WTI futures and options contracts by 16 million barrels, just 4 percent, over the seven days to Jan. 19.

Combined short positions in the main NYMEX and ICE Futures Europe contracts were cut from a record 392 million barrels to 376 million barrels, which was still the second-largest short recorded.

Shorting by hedge funds and other money managers has been closely correlated with the rise and fall of crude futures prices since the start of 2015.

The enormous short positions built up by hedge funds over the last three months have coincided with the decline in oil prices to the lowest levels since 2003.

But the concentration of short positions has left the price crash looking over-extended and vulnerable to any change in sentiment or simply profit-taking.

So it comes as no surprise once the selling pressure paused and some hedge funds began to lighten their short positions it triggered an aggressive rally.

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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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