Oil bears hesitate to put on shorts in whipsaw market

oil_barrels_010.jpgOil market bears want to believe Goldman Sachs’ forecast that crude could hit $20 a barrel. But many have been hesitant to make that bet.

U.S. data on Friday showed that money managers had expanded their short positions in oil futures in the latest week by the largest amount since July. However, in six of the last eight weeks, net long positions had increased.

The trend shows that investors who believe prices are headed lower are uncertain about the timing.

For those with short positions, the easy money has run out after oil’s 60 percent slide from the summer of 2014 to below $50 a barrel now. Now bears are struggling to navigate a rocky market.

“We’ve been whipsawed around quite a bit and it’s a very difficult trading environment,” said Doug King, manager at the $215 million Merchant Commodity hedge fund in Singapore, which was down 10 percent through September, partly due to its bearish bets on oil.

Since August, money managers have halved bets that U.S. oil will fall, while net “longs,” or bets for high prices, on NYMEX crude having risen from 116,377 on Sept. 1 to 165,855 on Oct 27, data from the U.S. Commodity Futures Trading Commission.

In the latest week short positions inched upward, but there were also more longs in the market. Bearish bets still remain below levels seen just two weeks ago and far less than the many bearish positions seen in August.

“I’m not going to risk a flat price view on a front-month position,” said Tariq Zahir, manager at Tyche Capital Advisors in Laurel Hollow, New York. “There’s just too much heat there.”

Zahir is still bearish on oil. But instead of betting on the outright price, he focuses on the idea that bets for oil for delivery sooner will fall versus delivery dates farther in the future. Those trades are “still in the money,” he said this week.

Some says oil bears’ hesitancy to pile in on the short side could become a self-fulfilling prophecy that drives prices upward, making this summer’s low a bottom.

That would defeat Goldman’s forecast that high crude supplies will keep prices “lower for longer.”

“At around $40, it’s just harder from a valuation perspective to be as bearish as you might otherwise be,” said the manager at a $1 billion fund that has some short positions on oil. “When you’re lacking trend, momentum and a catalyst, you end up trading more tactically.”
Source: Reuters (Reporting by Barani Krishnan; editing by Jessica Resnick-Ault, Jonathan Leff and David Gregorio)

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About Scott

Live next to Chevron refinery. Lots of petroleum consultants in the area. I am interested in learning more about the industry. Also, interested in finance, business, and investing in world markets.
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