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Hedge Funds Benefit from Rally in the Week Ended August 28

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Hedge funds boost bullish exposure to oil after previous week’s retreat

Hedge funds increased their net long position in WTI (West Texas Intermediate) crude during the week of August 4. They resumed their retreat from oil by cutting their bullish positions in the commodity in the subsequent week as oil prices dropped to their lowest levels since 2009.

Following this, hedge funds boosted their net long position in WTI crude by 6.2% in the week ended August 28 and benefited from the rally toward the end of the week.

The net long position of money managers in WTI crude fell by more than 11% in the week ended August 11, as shown in the above chart. Short positions rose to a six-month high, indicating a possibly bearish outlook for oil.

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Excess supply

With the end of summer, the US is entering a period that is usually characterized by a fall in refinery demand. The International Energy Agency recently said that the global surplus is likely to last through next year.

Additionally, the Organization of the Petroleum Exporting Countries (or OPEC) reported this week that its output last month was the highest in over three years.

Refinery closures and US rig count

Refineries are expected to carry out maintenance activity during September. With the summer driving season coming to an end, there is expected to be a fall in demand for crude oil. Refiners Marathon Petroleum (MPC), Phillips 66 (PSX), Tesoro (TSO), and Valero Energy (VLO), which make up about 10% of the Energy Select Sector SPDR Fund (XLE), posted an average return of 4.0% in the week ended August 28.

According to data from Baker Hughes (BHI) for the week ended August 28, the US oil rig count experienced a fall. However, the rig count still exceeds the figure in the week ended July 31. This could probably slow any production declines, with crude stockpiles exceeding the five-year average by ~100 million barrels.

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