Hedge Funds Now 'Strongly Bullish' On Oil

WTI crude oil prices have soared 37.6 percent in the past month, but the market remains divided on whether or not the oil rally is for real. Shares of the United States Oil Fund LP (ETF) USO have only risen 28.0 percent during the past month, an indication that many investors are not convinced that the gains will stick.

However, hedge funds and money managers have been making some huge bets on oil. In fact, the combined net long position in WTI and Brent futures currently sits at a nine-month high. That net long position has climbed by 200 million barrels year-to-date. 



“Signs of financial distress across much of the oil industry, coupled with data showing production outside OPEC falling, continued market chatter about an agreement among producers, and evidence of strong demand for gasoline, have allowed hedge funds to construct a more bullish narrative,” energy expert John Kemp writes.

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He adds that both the contango setup and fears over U.S. surplus storage capacity have led hedge funds to favor long positions in Brent over WTI by about 3.4 to 1.

Goldman Sachs is not convinced that the rally in oil prices is good for the market just yet.

“Sustained low prices are necessary in our view to maintain a sufficient level of financial stress,” Goldman recently wrote concerning the long-term rebalancing of the global oil market.

The latest surge in crude has actually pushed WTI into positive territory in 2016, welcome unfamiliar territory for oil bulls.

Disclosure: the author holds no position in the stocks mentioned.