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Are Hedge Funds Positioning For An OPEC Disappointment?

Offshore oil rig

The OPEC meeting in Algiers at the end of the month and the cooperation pact between Saudi Arabia and Russia hasn’t convinced the hedge funds that oil will breakout of its overhead resistance. The hedge funds and money managers have therefore reduced their net long positions by 80 million barrels in the week ending September 6, according to positioning data from regulators and exchanges, reports Reuters.

Last week, the bulls have only cut 23 million barrels of their long positions, indicating that the majority of oil bulls are still hopeful that higher oil prices are in sight. While the bulls have reduced their net long positions by around 100 million barrels in the previous two weeks, the existing positions still have a bullish edge.

The hedge funds that have closed their positions have pocketed handsome returns, as oil has rallied nearly 23 percent from the recent lows of just under $40 a barrel. They would need more concrete evidence of a deal going through in Algeria before we see more long positions being taken.

On the other hand, the shorts who were forced to cover their positions in the massive short squeeze of 56,907 futures and options contracts in the week ended August 1—the biggest since 2006—following rumors of a production freeze discussion by the OPEC in Algiers are sensing an opportunity to short again.

Mixed signals from the OPEC nations and a lack of commitment from the larger oil producers indicate that the Algiers meeting could be headed the Doha way. Therefore, the hedge funds have increased their short positions by 56 million barrels.

The analysts of the 12 investment banks surveyed monthly by The Wall Street Journal have kept their forecasts unchanged. They expect Brent crude to average $57 a barrel next year, a small increase of less than a dollar over the previous month’s survey. The forecast for WTI crude remained unchanged at $55 a barrel next year. Related: Record Year For Solar Expected As Installations Surge 43%

While the bulls are hoping that a production freeze this time in Algiers will propel oil higher above the resistance level of $50 to $52 a barrel, the bears sense that the possibility of a deal is dim, which will likely lead to a liquidation of long positions, hence they are willing to add short positions near the resistance levels, as they have a small stop loss above.

Because of long additions near the $40 a barrel mark and short additions near the $50 a barrel mark, both the levels are acting as strong supports and strong resistance levels. It is unlikely that either position will break without favorable news.

“What we’re going to need to see is some serious discipline from the OPEC producers” in order for prices to emerge from their trading range, said Virendra Chauhan, oil analyst at Energy Aspects. “In order to move into that $55 to $60 range, you need to see a change in tone,” reports Market Watch. Related: Is China Deliberately Trying To De-Rail The Russia/Saudi Oil Deal?

(Click to enlarge)

John Kemp, a Reuters market analyst points out that the hedge funds have accumulated and liquidated short positions in distinct cycles since the start of 2015, which have “closely mirrored the fall and then rise of oil prices,” as shown in the chart above.

The Algiers meeting should provide a definitive trend to the oil markets, either on the way up or the way down, depending on whether a meaningful deal is struck or they only attempt to jawbone oil prices again.

By Rakesh Upadhyay for Oilprice.com

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