Hedge fund managers continue to accumulate positions in crude and gasoline in the most sustained bull market since 2017 but the market is starting to look stretched and the balance of risks is shifting to the downside.
Hedge funds and other portfolio managers have boosted their net long position in the six most important petroleum futures and options contracts by 503 million barrels over the last 13 weeks.
Fund managers have added 294 million barrels of bullish long positions since Jan. 15 while trimming 215 million barrels of bearish short positions since Jan. 8, according to exchange and regulatory data published on Friday.
Bullish long positions now outnumber bearish short ones by a ratio approaching 7:1, up from less than 2:1 at the start of January.
Since 2015, the accumulation of a large concentrated long or short position has often heralded an impending turning point in the petroleum price trend.
In early January, the large number of hedge fund short positions signaled an approaching rally in prices from the lows late last year, as fund managers covered short positions.
By April, however, the concentrated long positioning started to signal a likely reversal in the rally, or at least a pause, if fund managers attempt to take some profits.
The biggest positioning imbalances are concentrated in crude and U.S. gasoline; there is no sign of similar imbalances in middle distillates such as U.S. heating oil and European gasoil.
CRUDE AND GASOLINE
Portfolio managers have raised their combined net long position in Brent and WTI in 11 out of the last 13 weeks by a total of 397 million barrels.
Long positions in Brent and WTI outnumber short ones by a ratio of almost 8:1, up from less than 2:1 at the start of January.
In addition, funds have raised their net long position in U.S. gasoline in nine out of the last 10 weeks by a total of 58 million barrels.
Long positions outnumber short ones by more than 26:1, up from just 2:1 in late January, one of the largest imbalances on record.
Bullish long positions in gasoline and crude are still below the record levels set earlier in 2018, so there is still scope for fund managers to increase their long positions.
But most of the short positions in crude and gasoline initiated during the fourth-quarter sell off have now been closed out, removing an important source of buying.
From a fundamental perspective, the balance of the risks still appears tilted to the upside, with the global economy so far avoiding recession, continuing supply disruptions in Venezuela and Iran, and output restraint from Saudi Arabia.
From a positioning perspective, however, the balance looks different. Long-short ratios that signaled a rally in January now imply that the balance of risks has started to shift to the downside.
If funds continue adding to their long positions, the risk of a future reversal in prices will only increase.