London — Despite the increase in tensions across the Middle East after the killing of an Iranian general by a U.S. air strike, hedge fund managers added only modestly to their bullish position in petroleum last week.
Hedge funds have gambled heavily on an oil price recovery this year, pricing in accelerating global growth, restrictive output policy by Saudi Arabia and continued tension short of war between the United States and Iran.
As a result, the potential to add further bullish positions is more limited than a couple of months ago and prices are vulnerable to a sharp correction if growth disappoints or the threat of open conflict diminishes.
Hedge funds and other money managers increased their bullish position in the six most important petroleum futures and options contracts by only 19 million barrels in the week to Jan. 7
Bullish positions increased by the smallest amount for five weeks, according to position records published by the U.S. Commodity Futures Trading Commission and ICE Futures Europe.
On the eve of the air strike that killed Qassem Soleimani, funds had already amassed a large bullish position in crude and refined fuels such as gasoline and diesel, which may have discouraged further buying.
Moreover, the crisis that erupted on Jan. 3 already appeared to be contained by Jan. 7, probably contributing to the limited rise in bullish positions evident in the weekly records.
Fund managers added slightly last week to existing positions in Brent (+15 million barrels) and WTI (+5 million) but there was little change in U.S. gasoline (+1 million), U.S. diesel (-2 million) or European gasoil (no change).
Funds have been net buyers of petroleum futures and options in 11 out of the past 13 weeks, increasing their combined position by a total of 533 million barrels since early October and helping to propel prices higher.
Portfolio managers have anticipated an acceleration in global economic growth and oil consumption during 2020 as well as continued output restraint by Saudi Arabia and its allies in the OPEC+ group of major oil exporters.
But the number of bullish positions is now at its highest for 15 months and is already in the 82nd percentile for all weeks since 2013, which may have made fund managers wary about increasing their exposure any further.
Funds’ bullish positions outnumbered bearish shorts by a ratio of almost 7:1 last week, which indicated positions were becoming moderately stretched, with the risk of a sharp reversal in prices.
In fact, since peaking on Jan. 8, front-month Brent futures have fallen by almost $7 a barrel (9.5%) as the threat of uncontrolled escalation in the Middle East receded, at least temporarily.
From a positioning perspective, the balance of price risks has shifted to the downside, with funds already holding a lot of bullish positions and vulnerable to disappointing economic news or any easing of tensions around the Gulf.