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Trade War Scares Hedge Funds To Cut Oil Bets To Two-Year Low

oil rig Eagle Ford

The escalating U.S.-China trade war is deterring hedge funds and other money managers from opening new positions in the WTI and Brent benchmarks, with total bets dropping to their lowest since 2016 in the week to July 31, according to data by European and U.S. options and futures exchanges compiled by Bloomberg.

The net long position—the difference between bullish and bearish bets—in WTI dropped by 1.4 percent to 386,764 futures and options in the week ended July 31, with longs down and shorts up. This was the lowest net long position in six weeks, according to data by the U.S. Commodity Futures Trading Commission (CFTC).

The net long position in Brent increased to 372,346 futures and options in the week to July 31, as short positions dropped, according to ICE Futures Europe data compiled by Bloomberg.

Money managers and hedge funds are backing away from betting heavily on oil in a volatile market as the U.S.-China trade war continues to escalate and as reports emerged last week that the Chinese had refused to scale back crude oil imports from Iran. Beijing—Iran’s single biggest oil customer—has declined a request by U.S. envoys to stop importing crude oil from Iran, but has reportedly agreed not to increase its imports of Iranian crude, according to sources who spoke to Bloomberg last week.

The U.S.-China trade war, however, has “caused investors to continue to trim net length, take profits and de-risk that position with the sense that oil’s upside is limited unless there’s material reduction in Iranian barrels,” Tamar Essner, analyst with Nasdaq Inc. in New York, told Bloomberg.

Hedge fund bets in WTI and Brent have been subdued since the middle of July after a heavy liquidation drove oil prices lower. Out of the six most important futures and options contracts linked to petroleum, only U.S. gasoline contracts saw a considerable movement—building up bullish positions—in the week to July 31, according to an analysis of exchanges data by Reuters market analyst John Kemp.

By Tsvetana Paraskova for Oilprice.com

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