Oil Market Sell-Off: Hedge Funds Stay Long

(Bloomberg Gadfly) -- Oil is bouncing on Monday after last week's sell-off. In one important respect, though, there was barely any sell-off worth mentioning.

Oil did drop about 10 percent across a six-day losing streak beginning February 2, mirroring the selling in financial markets generally. Brent crude retreated from $70 a barrel, while West Texas Intermediate fell below $60.

Yet you would hardly know it when looking at how hedge funds ended the week in terms of their market positions. Money managers' net length in futures and options for the three main crude-oil contracts fell by all of 2.3 percent, and it remains above 1 billion notional barrels. Aggregate net length in New York gasoline and diesel dropped by 7.2 percent -- the biggest decline in nine weeks -- but those positions are a fraction of the crude market.

Oil Market Sell-Off: Hedge Funds Stay Long

The speculative run that began in the middle of last year may have taken a breather, but that's hardly what you would call a retracement. Remarkably, while net length has come down somewhat, the ratio of money managers' long positions to short positions in crude oil actually increased slightly last week:

Oil Market Sell-Off: Hedge Funds Stay Long

The takeaway? Painful as last week was, the speculative money in oil remains firmly positioned for further gains (and roll yields; see this). That is simultaneously a backstop against panics like last week's and a store of fuel to supercharge future ones if hedge funds lose faith.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

To contact the author of this story: Liam Denning in New York at ldenning1@bloomberg.net.

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