(Repeats July 23 column. John Kemp is a Reuters market analyst.
The views expressed are his own)

* Chartbook: https://tmsnrt.rs/2LhKO1S

By John Kemp

LONDON, July 23 (Reuters) – Hedge fund managers have slashed
bullish long positions in petroleum at the fastest rate in more
than a year, as the gentle profit-taking in previous weeks
turned into a rush for the exit.

Hedge funds and other money managers cut their combined net
long position in the six most important futures and options
contracts linked to petroleum prices by 178 million barrels in
the week to July 17.

Net long positions were reduced by the third-largest number
of barrels on record, according to an analysis of data published
by regulators and exchanges going back to the first quarter of
2013.

The net long position in petroleum was cut below 1 billion
barrels for the first time since the middle of September 2017 (https://tmsnrt.rs/2LhKO1S).

The reduction was concentrated on the long side of the
market, where positions were slashed by 170 million barrels, as
managers took profits after the year-long rally in oil prices.

Short positions rose by just 8 million barrels and remain
close to multi-year lows, confirming the shift in net
positioning is being driven by profit-taking rather than any
newfound bearishness.

Long liquidation was concentrated in Brent, with net long
positions in the North Sea benchmark cut by 95 million barrels,
the largest one-week reduction since the series began in 2013.

But portfolio managers also cut net long positions in NYMEX
and ICE WTI (-34 million barrels), U.S. gasoline (-8 million
barrels), U.S. heating oil (-17 million barrels) and European
gasoil (-25 million barrels).

Hedge fund managers hold most of their positions in futures
and options with a relatively short duration to expiry since
these tend to offer the most liquidity, so the sell-off has hit
near-dated contracts especially hard.

Brent liquidation has therefore crushed the calendar
spreads, with contracts nearest to expiry now trading in
contango, and the whole of the first six months in a
backwardation of less than 40 cents per barrel.

LIQUIDATION CYCLE

The accelerating sell-off in petroleum futures and options
is not entirely surprising and conforms to a common pattern in
financial markets.

The sharpest liquidation and price falls come not straight
after prices peak, but when prices have been under gentle
pressure for some time, and the initial trickle of selling
finally turns into a torrent.

Benchmark Brent prices have repeatedly failed to break up
through the peak of just over $80 per barrel set in May.

Fund managers are still essentially bullish towards the
outlook for oil prices, but the extremely stretched positioning
during the first quarter has been partially corrected.

Portfolio managers hold more than eight bullish long
positions for every short bearish position in the petroleum
complex, but the ratio is down from almost 14:1 in the middle of
April.

In Brent, the ratio of hedge fund longs to shorts is down to
8:1, from 20:1 in late April; in European gasoil, the ratio is
down to 13:1, from 129:1 in late May.

For most market analysts and traders, the oil market outlook
remains fundamentally tight, with strong growth in consumption,
while production continues to be disrupted by problems in
Venezuela and Libya.

Pipeline capacity shortages in the United States may limit
further growth in production from the prolific Permian Basin
later in 2018 and early 2019.

On top of all this, U.S. sanctions on Iran threaten to
remove millions more barrels from the market from the start of
November, though how many remains unclear.

But the sharp rise in output and exports from Saudi Arabia
in June and July has increased the availability of crude in the
near term, contributing to the sell-off in Brent calendar
spreads.

And there are growing concerns about the combined impact of
high oil prices, a strengthening dollar and trade tensions on
the health of the global economy and oil consumption in the rest
of 2018 and 2019.

In the circumstances, many fund managers have chosen to
reduce their long exposure to oil, without choosing to go short
(yet) in a classic long liquidation cycle.

Related columns:

– Oil prices contend with strengthening dollar (Reuters,
July 20)

– Global economic slowdown is likely and necessary later in
2018 or 2019 (Reuters, July 17)

– Hedge funds quiet before oil-price plunge (Reuters, July
16)

– Brent stumbles as market resets after long rally (Reuters,
July 12)