Hedge funds keep cutting bets on oil rally as oil keeps rallying

Hedge funds cut their net-long positions -- the difference between bets on a price increase and wagers on a drop -- for a fifth consecutive week, the longest stretch of declines since November 2016. The reductions came just before Brent crude oil surged above $80/bbl this week for the first time since 2014.

“Positioning was long coming into the year, and you have the June 22nd OPEC even on the horizon,” said Chris Kettenmann, chief energy strategist at Macro Risk Advisors LLC. “People likely have made money. You can take some profits and then get back in should they continue to be consistent in their messaging.”

The Organization of Petroleum Exporting Countries, along with Russia, will meet next month to review production limits imposed in late 2016 that have helped erode inventories and revive slumping prices. Brent and the U.S. benchmark West Texas Intermediate crude are up 18% this year.

Banks from Barclays Plc to Morgan Stanley boosted their forecasts of Brent prices this week, and Total SA CEO Patrick Pouyanne said he wouldn’t be surprised to see $100 oil, which hasn’t been reached since September 2014.

Yet, some remain cautious. Russian Energy Minister Alexander Novak is meeting with Saudi Arabia’s Khalid Al-Falih in St. Petersburg later this month to discuss the oil market. The talks will continue when OPEC and its allies gather in Vienna next month, Novak said.

“We need to look at a longer period -- at how stable this price is, how volatile or not volatile it will be, what factors affect it,” Novak said Friday. “So let us see. We need to analyze the situation over a longer term.”

Changing stories

Hedge funds reduced their Brent net-long position by 3.7% in the week ended May 15 to 548,555 contracts, according to ICE Futures Europe data on futures and options released Friday.

The WTI net-long  position dropped by 6.2% to 385,283 futures and options, according to U.S. Commodity Futures Trading Commission released Friday. It was the biggest reduction in six weeks. Longs declined 4.9%, while shorts jumped 15%. Total positioning on WTI is at the lowest since August.

“You’re heading into that time when OPEC can start to change its story,” said Rob Haworth, who helps oversee $151 billion in assets at U.S. Bank Wealth Management in Seattle. At the same time, “we’re starting to get into that summer driving season, which is past peak refinery demand, and so if you’re in a seasonal trade, you need to start to unwind that.”

Based on some technical analysis, the rally might not continue. Brent’s 14-day relative strength index is above 70, a level that signals the commodity is overbought.

“I do think we’re set for a retreat,” said Walter Zimmermann, chief technical analyst at ICAP-TA. “This is herding behavior. Everybody is convinced we are going to $100.”