The number of bets on the rise of oil prices peaked in 2014

A two-year high

The number of net long positions in the three main oil benchmarks — futures/options on WTI on the new York Mercantile exchange (NYMEX) and the Intercontinental Exchange (ICE), as well as futures/options on ICE Brent reached a 17-month high. The net long position is the difference between the total number of bets on the rise and the rates at cheaper. The number of long positions (i.e., directly rates on the rise) has updated the record, reaching 733 thousand contracts from NYMEX and ICE, the world’s leading exchanges for trading oil futures.

The build-up of net long positions in oil has supported the oil rally: WTI jumped from thirteen-year-low of $26 in late January to $41 per bbl., quotations Brent have increased from $30 to $42 per barrel. According to Reuters, significant correlation between commodity prices and betting on oil hedge funds has been observed since the beginning of 2014.

The change of balance in the market of oil futures and options was the result not so much of increasing the amount of long positions — the number of the last eight weeks has increased by only 39 thousand contracts, how many are closing short positions, or bets on a decline in oil prices, which declined during the reporting period to 205 thousand contracts.

Record volumes

By the close of trading on both exchanges on March 22, participants of the market concentrated in the hands of the net long positions in three key oil contracts, the equivalent of about 579 million barrels. oil, writes Reuters. Thus, in three months they more than doubled their net long position, equivalent to the end of 2015 amounted to 242 million barrels.

Last peak of net long positions occurred in may 2015, when their equivalent amounted to 572 million barrels., while the historical maximum was recorded in June 2014, when the banned in Russia “Islamic state” attacked the oil-rich Northern Iraq, the indicator amounted to 626 million barrels.

If you take the European site separately, the record net long open positions in futures and options on Brent was beaten. Their equivalent which reached 364 million barrels.

Net short position for WTI on the NYMEX and ICE fell from 261 million barrels. at the beginning of February, to 112 million barrels.

According to data published on 25 March the Commission on futures trading in the U.S. (CFTC), the number of short positions in options and futures for oil WTI at stock exchange NYMEX has decreased from 2 February to 131 617 contracts, or 67%, is maximum for seven-week decrease in the last ten years. Over the last ten years, the situation when the number of short positions declined for seven consecutive weeks, was observed only twice: in September 2009 and in December 2012, CFTC figures show. But in that and in other case, the elimination of positions occurred not as rapidly as last week

News background is favorable for the recovery of oil prices. In the meeting in April, which will discuss the issue of freezing the production, will be attended by 15 or 16 oil-producing countries, said last week in Vienna, the Secretary-General of the Organization of countries — exporters of oil (OPEC) Abdullah al-Badri. Oil production in the U.S. fell to the lowest level since November 2014. The supply of oil in the country remains significant, with increased imports, and oil production Saudi Arabia and Russia, despite its frozen state, it remains at historically record levels.

As of 17:40 Moscow time the may futures for WTI went down on 2,89%, to $38,64/bbl on the NYMEX exchange, the futures for Brent crude on the ICE stock exchange became cheaper by 2.66 per cent to $39,2. A two-week low sales declined amid concerns that the market remains oversupplied to support the price at $40/bbl.

Downside risks

Achieving a record level of short positions in January and February sent prices to multi-year lows, dropping below $30/bbl. in January and February. Now their liquidation pushes prices up. The current scenario is the opening of hedge funds a large number of shorts and their subsequent closing is repeated for the third time since the beginning of 2015, and each time it ended in violent price rally.

But the current growth of quotations, apparently already ended because the hedge funds completely shut down a record number of shorts open from October 2015. Because hedge funds went from one extreme to another, first by closing a record number of short positions, and then opening almost a record number of long positions, the balance of risks has now shifted toward lower quotations.

In the short term, the main risk to the market is closing long positions. This will happen if the hedge funds decide to take profits from higher prices and will begin to close long positions. In this case there will be a sharp drop in prices, which happened in June 2014, may 2015 and October 2015. According to Reuters, these risks are obvious to market participants: in the last three weeks oil prices rose less than expected on the basis of the elimination of a large number of short positions. The increase in the cost of WTI ended at $40, whereas if we consider the number of closed short of the benchmark was to rise to $50/bbl.