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Column: Hedge funds gamble OPEC will tighten oil market too much: Kemp

From Reuters - January 2, 2018

LONDON (Reuters) - Hedge funds are the most bullish about oil prices in years, expecting further gains even as prices touch multi-year highs and ignoring the risk linked to such a large concentration of positions.

A record net long position has been accumulated by hedge funds and other money managers, amounting to 1,183 million barrels in the five biggest futures and options contracts covering crude, gasoline and heating oil.

Portfolio managers held a record 1,328 million barrels of long positions in Brent, WTI, U.S. gasoline and U.S. heating oil on Dec. 26, according to data published by regulators and exchanges.

By contrast, hedge funds held only 145 million barrels of short positions, the lowest level for 10 months and among the lowest at any point since the start of 2013.

Fund managers now hold more than nine long positions for every short position, the most bullish picture for at least five years (tmsnrt.rs/2CduGpC).

There are record net long positions in Brent crude (561 million barrels), WTI (461 million barrels) and U.S. heating oil (82 million barrels).

There are also large, if not quite record, net long positions in U.S. gasoline (79 million barrels) and European gasoil (131 million barrels).

In many of these contracts hedge fund positioning appears extremely stretched, with the ratio of long to short positions at multi-year highs.

DOWNSIDE RISK

The concentration of so many bullish positions poses a significant downside risk to prices if and when portfolio managers decide to close them out and realize some of their paper profits.

For the time being, however, most fund managers are ignoring the liquidation risk and focusing on the prospect of further price increases first.

There are plenty of reasons to be bullish about the outlook in 2018. The global economy is in a synchronized upswing and world trade is growing at the fastest rate since the start of the decade.

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