Hedge funds’ oil shorts reach peak for the year

Hedge funds’ bets against the oil price have risen to the highest level this year ahead of next week’s Opec meeting, in the expectation the cartel’s most powerful members will stick with their policy of keeping output high.

A worsening global oil glut has seen speculative funds amass a position in New York and London equivalent to more than 3.5 days of global oil demand, which will make money if the price falls further.

The short futures and options position in London-traded North Sea Brent is the highest since October 2014 at 141m barrels, rising a quarter in the last week, while bets against US benchmark West Texas Intermediate have jumped nearly 60 per cent since early October to almost 200m barrels.

Funds’ renewed willingness to bet against oil’s eventual recovery may cause concern for Opec as it prepares to meet in Vienna, one year on from the Saudi-led decision to target higher-cost producers by ramping up supply.

That move has seen oil collapse to its lowest since 2009, with little sign of an imminent recovery.

But the size of the short position is also making the oil market skittish, with traders fearing a so-called “short squeeze” should the oil cartel spring any sort of surprise next Friday.

On Monday, Brent jumped more than 2 per cent to back above $45 a barrel after traders tried to decipher a brief statement from Saudi Arabia’s cabinet following its regular weekly meeting. It was trading at $45.60 on Tuesday, up 1.6 per cent, reaching session highs after reports that the Turkish military shot down a Russian-made jet violating Turkish airspace.

What many saw as a straightforward reiteration of Saudi’s long-held official position — that it will co-operate to stabilise the market only if countries outside the group also agree to cut production — sent others scrambling to close their bearish bets, fearing a shift in the Kingdom’s stance.

“The knee-jerk reaction in prices suggests a market where positioning is short,” said Amrita Sen, chief oil analyst at Energy Aspects in London, adding that the US Thanksgiving holiday was also likely reducing liquidity, increasing the likelihood of larger moves.

“Saudi Arabia has always maintained it will not reduce production unilaterally but will only do so if other Opec and non-Opec countries collaborate.”

Analysts said the large short position was making some nervous due to memories of a near 29 per cent price spike in late August, which took Brent from a six-year low of $42.23 a barrel to $54.32 in less than a week.

While the price recovery was shortlived, it followed short sellers cashing in their positions during light summer trading.