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Hedge Funds Turn Bearish on Crude Oil

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Hedge funds increase short positions and lower long positions in crude oil derivatives

As per data from the U.S. Commodity Futures Trading Commission, hedge funds and other asset managers have turned extremely bearish on oil prices. Hedge funds increased short positions on crude oil options and futures from 84 million barrels last month to 138 million barrels as of the week ended July 17, 2015. Long positions were lowered to 292 million barrels from 340 million barrels over the same period.

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Despite having an inherent bias to long positions, the hedge fund industry’s ratio of long to short positions came down from four to one in June to about two to one in recent weeks. Closing long positions and opening fresh short positions possibly explain the downward trend in US crude oil prices during the past month. However, with the requirement for short positions to be eventually bought back, selling pressure on oil could be moderated, possibly leading to a slight rise in oil prices again.

Optimism still prevails amid a handful of US shale producers

Despite oil prices taking a sharp nosedive significantly below the $60 per barrel break-even point of several producers, a few shale producers are still continuing with plans for deploying more rigs in the near future. Pioneer Natural Resources (PXD) was the first major company to confirm its decision to dig more wells, saying that it would keep adding two rigs every month as long as oil prices stay “constructive.” WPX Energy (WPX) mentioned earlier this month that the firm’s decision to increase its rig count by two during this year was unaffected by the massive fall in crude prices from June.

PXD and WPX are part of the Energy Select Sector SPDR ETF (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) with weights of 3.5% and 1.1%, respectively. While drillers such as Transocean (RIG) are suffering a squeeze on profits, refiners such as Tesoro (TSO) are continuing to experience profits. However, this is not expected to last, as we discussed previously in Slowing Latin American Exports Could End Golden Era of US Refiners and Refiners May See Good Times Come to an End Soon.

In the next part of this series, we’ll analyze the probability of a severe crash in the oil markets.

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