Hedge funds raise bullish oil trading bets, get caught out

20 July 2010 20 July 2010

BonTrade

Hedge funds and other large speculators got caught out when they raised bullish trading bets that oil would gain by the most in more than three years, since 2007, just as oil futures prices began to slide, the second straight week money managers lined up on the wrong side of the market.

Net long positions on the NYMEX rose 67 percent the week ended July 13th, the most since February 2007, according to the weekly Commitments of Traders report from the CFTC.

Oil futures fell on four out of five days on the NYMEX last week, ending down 0.1 percent at $76.01 a barrel as of July 16th. It rose 5.4 percent the previous five days, the biggest weekly gain since May 2010.

“Just like last week, when they were short when oil prices were up, now they were long when prices were down,” said Hamza Khan, an analyst with Schork Group Inc., a consulting company in Pennsylvania.

Oil slipped last week amid evidence that the US economic recovery is slowing, reducing fuel demand in the world’s second largest energy consuming country.

Hedge funds suffered their worst second quarter in a decade this year, losing 2.79 percent, according to Hedge Fund Research’s HFRX Global Hedge Fund Index.

Net long positions among hedge funds and other large speculators in crude oil futures and options combined on the NYMEX rose to 84,455 for the seven days ended July 13th, according to the CFTC data.

‘Low Base’

Speculators have pared bullish bets on oil by 56 percent since April 2010, when US Light crude oil futures traded at a 2010 high of $86.84 a barrel on the NYMEX. Net long positions in futures and options combined fell to 50,503 in the week ended July 6th, the lowest level in more than a year.

Last week’s “low base” exaggerated the significance of this week’s jump in bullish bets, said Tim Evans, an energy analyst at Citi Futures Perspective in New York.

“Most of the money is really on the sidelines, we just don’t have big bets in these markets right now,” he said. Markets may “chop sideways, possibly for years,” he said.

Crude oil prices will have to break out of its range in order to entice managed money back into the market, said Khan at Schork Group. Oil has traded mostly in an $18 band since August 2009, making it hard for speculators to turn a profit on crude, he said.

“We’ve been unable to break below $68 or above $86,” Khan said. “The buy and fly mentality just isn’t working in equities and it isn’t working in crude oil trading.”