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Hedge fund managers sold yet more oil last week as a weaker outlook for the global economy and expectations of a hit to consumption more than offset concerns about sanctions on Iran and Venezuela and other production problems.

Hedge funds and other money managers were net sellers of another 96 million barrels of petroleum-related futures and options contracts in the week to June 11, exchange and regulatory data shows.

Fund managers have now sold 396 million barrels in the six most important petroleum contracts over the last seven weeks - substantially reversing net purchases of 609 million barrels in the 15 previous weeks.

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Portfolio managers last week sold Brent (12 million barrels), NYMEX and ICE West Texas Intermediate (52 million), U.S. gasoline (8 million), U.S. heating oil (6 million) and European gasoil (18 million).

The heaviest selling was concentrated in WTI, reflecting concerns about local overproduction of crude in the United States, and middle distillates, reflecting concerns about a global slowdown hitting freight and manufacturing.

Hedge funds now hold just three bullish long petroleum contracts for every bearish short one, down from a ratio of almost 9:1 on April 23.

SHIFTING RISK

From a fundamental perspective, the market is still delicately poised between bearish risks arising from a global slowdown and bullish risks from supply interruptions in the Middle East and elsewhere.

From a positioning perspective, however, the balance of risks had swung from strongly bearish at the end of April to neutral or even slightly bullish by the middle of June.

The shift is most evident in middle distillates, where funds are now running the biggest net short position in U.S. heating oil for almost two years.

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Fund managers have rarely held such a large short position except during a recession or an extended global slowdown such as that of 2015/16.

Similarly, hedge funds are now running one of the most bearish positions in NYMEX and ICE WTI since the end of the oil market slump in early 2016.

If the global economy slows further in the second half of the year, as most traders expect, and seems the most likely outcome, it will validate these bearish positions as prices come under further pressure.

But if the economy avoids recession and re-accelerates, which remains possible, the race to close short positions and re-establish new longs would produce a ferocious short squeeze.

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