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An oil pump works at sunset in the desert oil fields of Sakhir, Bahrain, in this file photo.

Hasan Jamali/THE CANADIAN PRESS

The commodities markets can work in mysterious ways, and oil is certainly doing that now. While the common assumption is that the speculative short positions held by the hedge funds are overtaking the market, they are in fact greatly outnumbered by the speculative long positions. That means more hedgies hope to profit from rising prices than falling ones.

That's a brave bet when oil prices are in something close to freefall. As oil prices plunge, it is the longs, not the shorts, who are looking vulnerable.

In late September, the speculative long positions on U.S. oil prices – West Texas intermediate (WTI) is the benchmark – was about 420,000 contracts (each contract represents 1,000 barrels). The short positions amounted to only about 130,000 contracts, putting the net speculative long position at 290,00 contracts. That net position is extremely high, historically speaking.

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What do the longs see that the shorts do not? They could be gambling on an imminent bounce-back in prices. Or they could be dead wrong.

To be sure, the oil glut in North America is not as extreme as it appears elsewhere on the planet; fed by surging shale oil production, newly expanded refineries in the United States are running flat out and exporting a lot of their output, narrowing the traditional price gap between WTI and Brent crude, the latter being the effective global benchmark. But the overall picture has not been encouraging for traders who are betting that oil prices will reverse themselves.

On Wednesday, prices for WTI and Brent fell again, by more than 1 per cent each. The collapse of Brent has been a stunner. The price for November deliveries was just below $91 (U.S.) a barrel, for a one-year decline of 17.5 per cent. All of the decline has come since July.

In early 2012, when the Western world was climbing out of its deepest economic downturn since the 1930s, Brent was trading at about $125. In early 2008, before the financial crisis, the price went as high as $147 and Goldman Sachs predicted that $200 was credible as the "peak oil" theory seemed on the verge of becoming a nasty reality.

WTI has held up somewhat better, but only somewhat. It traded on Wednesday at about $87.30, for a one-year drubbing of almost 17 per cent.

There's lots of oil on the planet. Rising shale output has pushed American production to a 28-year high. But that's not exactly news. What is news is that the European recovery appears to be going into reverse. A grim string of data points to plunging German manufacturing and exports, putting Europe's biggest economy on the verge of a fresh recession. Italy, the euro zone's third-largest economy, is back in recession and France is close to one.

The other news affecting oil prices is that Libya, home of the biggest reserves in Africa, is magically back in the game.

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Early this year, Libyan exports were close to nil because the country was pulverized by civil war, suicide bombers, and attacks on infrastructure – and still is – to the point that the Libyan parliament fled Tripoli and set up shop in Tobruk, near the Egyptian border. But the Libyan National Oil Corporation has somehow managed to overcome virtually every obstacle. Two weeks ago, as it was busy downgrading oil price forecasts, the U.S. Energy Information Administration (EIA) said: "The return of significant Libyan crude oil production – which has surpassed market expectations in both volume and longevity – has been an important contributor to downward pressure on Brent prices."

The EIA estimated that Libyan oil production reached 900,000 barrels a day in mid-September, up from 200,000 only three months earlier. In 2010, a year before the outster and killing of Libyan strongman Moammar Gadhafi, Libya was producing about three million barrels a day, so the potential for greater amounts of Libyan oil seeping onto the global markets should not be discounted.

Will oil prices continue to slide? With U.S. shale production climbing, Europe slowing down and Chinese growth rates on the wane, they could. Traders and investors also seem convinced that the Islamic State (IS) militants will not threaten Iraq's largest oil fields in the southern part of the country. If they do, you can bet the American-led bombing campaign against IS will get a tad more belligerent.

The Organization of Petroleum Exporting Countries is the wild card, and it's a biggie. On Nov. 27, OPEC, which controls about a third of global oil supply and two-thirds of oil reserves, meets in Vienna for a full ministerial conference. The oil glut and how to deal with it will dominate the agenda. An enforced cutback would lift prices, but, so far, only Iran is publicly pushing Saudi Arabia to whip the member countries into shape.

In the end, OPEC may decide that defending its market share, not the price, is more important. Remember that OPEC's main competitor is Russia and OPEC doesn't like seeing Russia picking up more customers. Neither does the United States, which is no doubt delighted that falling oil is damaging Russia's ability to finance its budget.

Another theory suggests that the best cure for falling prices is falling prices. As they go down, demand will pick up and many of the expensive U.S. shale wells will turn off the spigot, tightening supply. The Saudis would love that.

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In the meantime, the funds that put long positions in place will be nervous wrecks. If OPEC does not come to their rescue, a lot of hedgie blood will be mixing with the oil splashing around the planet.

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