Oil short-sellers return as doubts loom on OPEC's horizon

Bets on falling Brent rose by the most since June

Short-selling is rearing its head in the oil market again.

After bullish bets on Brent crude hit a record and futures surged to two-year highs, hedge funds are pulling back with a sense that the rally has reached its limit for now. Wagers on lower prices rose by the most since June as West Asian tensions took a backseat, while uncertainty looms over Saudi Arabia’s push to extend OPEC’s output curbs this month.

“We’re at levels where the market appears to have crested,” said Gene McGillian, a market research manager at Tradition Energy in Stamford, Connecticut. “Continuing to see supply draw-downs is probably what the next leg of the rally will be predicated on.”

Doubts over Russia’s willingness to go along with the Saudis, record production from America’s prolific shale fields and a worse outlook for demand from the International Energy Agency helped snap oil’s longest streak of weekly gains in a year.

At the same time, concern over heightened geopolitical risks in West Asia seems to have subsided, at least for now, said Rob Haworth, who helps oversee about $150 billion in assets at US Bank Wealth Management in Seattle.

“We haven’t seen more conflict,””he said. “For prices to get a lot higher, you have to see a meaningful increase in disruptions — and we haven’t.”
 

Hedge funds lowered their Brent net-long position — the difference between bets on a price increase and wagers on a drop — by 1 per cent to 537,557 contracts in the week ended November 14, according to data from ICE Futures Europe. Shorts surged 8.7 per cent, while longs fell 0.1 per cent.

Meanwhile, the net-bullish position on West Texas Intermediate, the US benchmark, rose 10 per cent to 349,712 contracts over the same period, according to the Commodity Futures Trading Commission. The net-long position on benchmark US gasoline rose 11 per cent, and diesel net-longs rose 3.3 per cent.

But that optimism may be fading, too. WTI also fell from its recent highs, with American crude stockpiles rising by more than 4 million barrels in two weeks.

Plus, there are real risks that OPEC may not be able to effectively extend cuts and will add to the overhang spurred by the US shale surge, said Haworth.

“It’s hard for me to make a case that we’re creating a new higher trading range,” he said. “We’re still staying cautious here.”