There are a lot of smart people in the global financial markets. They have to be smart; otherwise, the funds and the financial institutions they work for won’t make any money. One particular segment of the global financial market that tends to attract more than its fair share of unusually intelligent people is the hedge fund industry. Pay close to attention to hedge fund bets in the oil market to get a clear understanding of where oil prices may be in the short to the mid-term future.
Things aren’t looking up for oil investors, thanks to record oil surpluses in the United States as well as the fact that oil production in the US continues to increase. This may seem puzzling as more and more oil rigs are mothballed. In fact, the application for new drilling licenses has crashed through the floor. Why is it that US oil production continues to ramp up while drilling has declined? The answer is pretty straightforward. Hedge fund managers are pointing to the fact that dramatic improvements in drilling technology enable shale oil and American oil players to continue to increase their overall oil production with less oil rigs.
Of course, this all paints a fairly gloomy picture for the overall oil market at least in the short-term. The picture doesn’t get any better when we look at the consumption side. On the demand side of global oil, things aren’t improving because the global economy, except for the United States, is facing a slowdown that can drag on for the next two to three years. Based on all these factors, it’s not a surprise that hedge funds are betting big against oil. In fact, the short positions on West Texas Intermediate crude have spiked up to its highest level since the month of September in 2010. According to the US Commodity Futures Trading Commission, the amount of long positions—these are positions that are betting that the price of oil will increase—has declined for the first time in three weeks. Expect the smart money to continue to speculate against oil if present supply and demand trends persist.
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