By October 30, 2017 Read More →

Column: Brent crude tries new trading range as funds stay bullish

Brent crude

Most investors assume the floor for Brent crude prices has moved higher to $50 or even $55, and the ceiling somewhere above that. Nexen photo.

Brent crude may climb towards $65/barrel: Fund managers

By John Kemp

LONDON, Oct 30 – Hedge funds have added to bullish positions in oil and most refined products even as prices hit their highest since 2015, in a sign investors expect prices to move into a higher range.

Hedge funds and other money managers had accumulated bullish long positions in crude, gasoline and heating oil totalling 1.189 billion barrels by Oct. 24, according to regulatory and exchange data.

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Portfolio managers have increased long positions in the five main petroleum contracts by almost 374 million barrels (46 per cent) since the end of June and the number of paper barrels now comfortably exceeds the previous peak set in February.

From a pure positioning perspective, the concentration of long positions has become a significant source of downside risk to prices in the event funds attempt to realise some profits.

Nonetheless, managers have continued adding to rather than reducing their positions, which strongly suggests many investors see oil prices moving into a new and higher range.

For the last 16 months, Brent crude prices have been trading in a range of about $45 to $55 per barrel, with hedge funds alternately buying and shorting the market when prices move towards the extremes.

But hedge fund managers amassed a near-record net long position of 507 million barrels in Brent by Oct. 24 even as prices were on their way to breaking through the $60-mark for the first time since 2015.

Sentiment towards Brent remained overwhelmingly bullish, with long positions outnumbering short ones by a ratio of 9.48:1, the biggest imbalance for eight months.

Fund managers held 567 million barrels of Brent long positions, just 11 million below the record set at the end of September, but less than 60 million barrels of shorts, the lowest since February.

The position data indicate fund managers see little risk of Brent prices dropping back below $50 per barrel, or maybe even $55, but a good chance prices will remain above $60, and maybe even climb towards $65.

Statements by senior OPEC and non-OPEC officials that the current production pact will likely be extended beyond its scheduled expiry in March 2018, perhaps by as much as nine months, have boosted confidence.

Reports that US shale producers are also struggling to continue raising output amid productivity problems and pressure from shareholders to improve financial returns have added to bullish sentiment.

Fund managers added to their existing large long positions in US gasoline and heating oil, with inventories still low before the winter, but some fresh short positions emerged.

The concentration of long positions in crude, gasoline, heating oil and European gasoil poses a significant reversal risk when hedge funds eventually decide to liquidate some of their positions.

The market is becoming progressively more stretched, with relatively few short-sellers to serve as buyers and stabilise prices when the inevitable liquidation comes.

But the shift in positioning suggests the old $45-55 Brent range may no longer hold, with most investors assuming the floor has moved higher to $50 or even $55, and the ceiling somewhere above that.

Related columns:

Oil market set to move from rebalancing to tightening”, Reuters, Oct. 30

Oil prices creep upward as traders test higher range”, Reuters, Oct. 23

Investors hit peak bullishness on oil”, Reuters, Oct. 16

(Editing by Edmund Blair)

John Kemp is a Reuters market analyst. The views expressed are his own.


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