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Hedge Funds Are Bearish. A Bullish Sign For Oil?

Hedge Funds Are Bearish. A Bullish Sign For Oil?

Last week’s Commitment of Traders report showed yet another round of massive selling of ICE Brent and NYMEX WTI contracts by hedge funds. NYMEX WTI net length fell from 240k contracts to 206k contracts (-14% w/w) while ICE Brent net length held by funds decreased from 409k contracts to 361k (-12%.) On a combined basis net length between the two contracts stands at its lowest mark in 14 months and gross short positions held by funds have more than doubled in the last four weeks.

At first glance this seems like a highly bearish set of circumstances for oil, right? The world’s speculators- many of them energy experts- seem aggressively bearish on crude. A closer look, however, reminds us that the pros don’t always get it right and that a bearish flush of headlines can frequently clear the way for the next move higher in prices. For example, gross short positions in NYMEX WTI (meaning the total amount of bearish positions held by funds) currently stand at 64k contracts. The last time this measure exceeded 50k contracts was back in July, just in time for oil to rally from $70 to $86 over the next two months. In 2017 gross shorts reached a 5yr high 180k contracts which perfectly coincided with a 2yr low in prices at $58. Even more notable was a 6yr low in hedge fund net length in January of 2016 which preceded oil’s rally from $26/bbl to $52 over the coming 5-month period. Going back just one more year to 2015 funds liquidated their net length by 30%…

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