LONDON, Dec 4 (Reuters) – Hedge fund managers raised their bullish position in crude oil and refined products by another 63 million barrels to a record 1,155 million barrels in the week before the OPEC meeting.
Portfolio managers were emboldened as it became clear OPEC and its allies were likely to extend production cuts for another nine months until the end of 2018.
Fund managers have brushed aside concerns about the enormous concentration of long positions already in the market and the risk of a sharp liquidation-driven reversal.
The focus has instead been on the potential for a further tightening of crude and product markets next year as oil consumption continues to grow strongly and OPEC restricts output to draw down inventories.
The increase in net long positions was concentrated mostly in U.S. crude (WTI) where net length increased by 52 million barrels in the week to Nov. 28.
Net length in Brent rose by 12 million barrels while there were only minor changes in U.S. gasoline (-3 million barrels) and heating oil (+2 million barrels).
WTI appears to have been playing catch-up with Brent, where net long positions have been at or near record levels since the start of November.
In contrast to Brent, traders have taken a much more cautious view on WTI, owing to the local oversupply of crude in the U.S. Midwest and around the WTI delivery point at Cushing.
But some of that caution appears to have evaporated following problems with the Keystone pipeline that delivers crude from Canada into the region.
Hedge fund managers have cut short positions in WTI to just 40 million barrels, the lowest level since February 2017 and before that July 2014 at the start of the oil slump.
Across the entire petroleum complex, the imbalance between long and short positions has become extreme, which suggests that the risk of a sharp price reversal remains high in the short-term.
Hedge funds hold almost 8.5 long positions in the crude and fuels futures and options contracts for every short position, the second-highest ratio on record.
The only time that the ratio was more stretched was earlier this year on Feb. 21, and that preceded a sharp sell-off in crude prices in March.
For now, however, portfolio managers are focused on the prospect of further price rises in 2018 rather than the risk of a short-term price decline.