Hedge funds appear to be falling out of love with oil, having reined in a record-breaking bet on higher prices, as Opec and Russia discuss raising production ahead of their meeting this month.
Speculators had built up a record bullish position in oil in the early months of this year, accumulating a so-called net-long position — the difference between bets on higher and lower prices — of more than 1bn barrels across North Sea Brent and the US benchmark, West Texas Intermediate.
That was one factor helping drive Brent to a four-year high above $80 a barrel late last month, but there are growing signs funds are losing their appetite.The combined net long position across Brent and WTI has now been trimmed for six consecutive weeks, with the initial trickle of bets being closed out at risk of turning into a flood.
In the week to May 29, exchange and regulatory data showed hedge funds reducing net longs by more than 10 per cent to just 823m barrels equivalent on paper, giving them the least bullish position since September last year.
“Saudi Arabia and Russia’s recent signal that production cuts could be eased helped sent crude oil sharply lower during [last] week,” said Ole Hansen, head of commodity strategy at Saxo Bank. “Five consecutive weeks of selling became six with last week’s selling being the most aggressive seen so far in this current cycle.”
However, some traders and analysts believe that this is just a sign of profit-taking rather than a significant shift in the long term view of crude.
Brent prices have rallied by more than 50 per cent in the past 12 months, boosted by output cuts by Opec but also strong demand and concerns about low investment by big energy companies following crude’s slump from above $100 a barrel in 2014.
While Opec and Russia may decide to raise oil output when they meet over June 22-23 in Vienna, there are fears this may only give prices a temporary respite — filling in for production lost from Venezuela’s economic crisis and looming sanctions against Iran, but at the expense of cutting into limited spare capacity.
“There are still almost three weeks to go until the Vienna meeting …and volatility is all but guaranteed to stay with us,” said Tamas Varga at oil brokerage PVM in London.
Brent crude oil slipped 1.5 per cent on Monday to $75.68 a barrel in afternoon London trading, while WTI lost 1.2 per cent to $65.01 a barrel.
In gold, funds are becoming more bullish, however. The net-long position in the precious metal more than doubled last week to 61,000 lots as hedge funds piled in on the back of heightened geopolitical tensions and other investors closed bearish bets.
In spite those changes, the price of bullion slipped below $1,300 an ounce on Friday as a strong US jobs data and a strengthening dollar triggered selling from gold-backed exchange traded funds (ETFs). The employment report bolstered expectations that the US Federal Reserve would increase interest rates this month, a move that could help support the US currency.
“The US dollar has continued to be the primary driver of gold pricing in recent weeks, outweighing safe-haven demand from escalating geopolitical risks,” said analysts at Citi.
The net-long position in gold still remains significantly below its one year high of 264,000. Gold was trading around $1,295 on Monday.
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