By John Kemp
LONDON (Reuters) - Hedge fund managers have become very bearish about the outlook for oil prices as production from countries outside OPEC grows and threatens to undermine the effectiveness of OPEC’s output controls.
Hedge funds and other money managers cut their combined net long position in the three major futures and options contracts linked to Brent and WTI by 51 million barrels in the week to June 13 (http://tmsnrt.rs/2rMOh9T).
Fund managers cut their net long position for the second week running by a cumulative total of 91 million barrels, according to data published by regulators and exchanges (http://tmsnrt.rs/2shCOmq).
Portfolio managers also cut their net position in gasoline by 13 million barrels and heating oil by 19 million barrels last week (http://tmsnrt.rs/2shNukU and http://tmsnrt.rs/2rMooXW).
Hedge funds have discounted the fact oil prices are already under than $50 per barrel and reassurances from OPEC ministers that global oil stocks will draw in the second half of the year.
Instead they have focused on the continued rise in the number of rigs drilling for oil in the United States and signs gasoline and diesel demand may not be growing fast enough to absorb the record fuel being produced by U.S. refineries.
The U.S. Energy Information Administration predicts global oil stocks will draw down in the third quarter of 2017 as a result of OPEC’s output cuts.
But global stocks are expected to rise again through 2018 as OPEC compliance deteriorates and supply from non-OPEC sources increases.
Bearish sentiment among oil traders has triggered a wave of short selling, with hedge funds adding 45 million barrels of extra short positions in crude, as well as 15 million in gasoline and 16 million in heating oil.
There are signs hedge funds may have embarked on the eighth cycle of short-selling in WTI since the start of 2015, though it is still too early to tell.
The only supportive factor for oil prices in the short term is that so many short positions have been established and there are relatively few long positions left to liquidate.
Conditions are in place for an eventual short-covering rally but the rebound may not come until there are clear signs global stocks are falling and U.S. shale drilling is levelling off.
(Editing by Edmund Blair)