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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Hedge Funds See Further Upside For WTI

Oil

Robust oil demand growth and reduced global stockpiles have instilled confidence in the oil market lately. Signs that the OPEC cuts have finally started to work—with Brent futures now in backwardation and oversupply steadily diminishing over the summer—have added to the bullish sentiment.

Hedge funds reacted to the signs of tighter market by boosting their net long position—the difference between long and short positions—in both Brent and WTI in the week to September 19.

Money managers increased their net long position in WTI by 32 percent to 208,292 futures and options, boosting the net bets on a rise in the U.S. crude benchmark by the most since December last year, according to data by the U.S. Commodity Futures Trading Commission reported by Bloomberg.

Last week, the long positions on WTI increased by around 9 percent, whereas short positions dropped 15 percent.

In Brent, hedge funds upped their net long position by the most since March this year—8 percent to 464,980 contracts, according to ICE Futures Europe data.  

In the aftermath of Hurricane Harvey, which knocked off more than 20 percent of U.S. refinery capacity in the peak of refinery shutdowns, hedge funds are betting on a rise in fuel prices and have boosted their net long positions on U.S. gasoline and diesel to highs not seen for years. According to data crunched by Bloomberg, the net long position on benchmark U.S. gasoline rose nearly 4 percent to 71,193 contracts, the highest in more than three years. Money managers’ net long position on diesel soared by 11 percent to hit the highest since the beginning of 2013.  Related: As OPEC Compliance Peaks, Can The Drawdowns Continue?

A month ago, money managers were far more optimistic on a rise in Brent prices than on WTI.

In the month to end-September, the International Energy Agency (IEA) and OPEC issued reports suggesting that the global commercial oil stocks have been diminishing, while oil demand growth is strong and expected to stay that way. The IEA reported that world oil supply fell by 720,000 bpd in August compared to July, while on the other hand, the agency revised up its forecast for oil demand growth this year to 1.6 million bpd from the previous estimate for 1.5 million bpd growth.

OPEC, for its part, said last week that commercial oil stocks in the OECD have dropped by 168 million barrels since the beginning of the year, but 170 million barrels of stock overhang still weighs on the market. Narrowing contango and the Brent backwardation are also helping crude in floating storage to draw down, with an estimated 40 million barrels drop in storage since the beginning of the year.

“The fundamentals are looking a heck of a lot better,” Phil Flynn, senior market analyst at Price Futures Group Inc., told Bloomberg.

Boosted by the bullish supply-demand reports, oil prices rallied on Monday, with Brent hitting a more than two-year high on strong oil demand growth and the threat to Kurdish oil exports over the referendum on independence.

WTI futures settled at $52.22 on Monday, rising by more than 20 percent since the June 21 low of $42.53 and returning to bull market territory.

While hedge fund bullish bets on WTI jumped the most since December 2016, some analysts reckon that some longs will be dropped because traders would take their profits. Related: What Happens If Trump Trashes The Iran Nuclear Deal?

“That’s been the trade. Buy at $45, sell at $50 and until you consistently break that 200-day moving average to the upside, until you’re proven wrong with that, continue with that trade,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors LLC, told Bloomberg in an interview.

Right now, things are looking up for oil market fundamentals and oil prices. Yet, a lot of factors—including profit-taking, the fate of the OPEC output cut pact, and geopolitical events—will determine the trend in coming weeks and months.  

By Tsvetana Paraskova for Oilprice.com

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