Hedge Funds Are Dumping Oil, But Remain Extremely Bullish

It seems as though U.S. oil producers and investors may have gotten a bit ahead of themselves by betting on a quick recovery. Despite OPEC delivering on its pledge to cut production by 1 million bpd, U.S. crude oil stockpiles remain at record levels.

Oil investors betting that the OPEC production cut would help alleviate the U.S. oil glut have so far been sorely mistaken.

New data from the Energy Information Administration this week revealed U.S. crude stockpiles at 528.4 million barrels. U.S. production bottomed in mid-2016, but has been on the rise ever since OPE agreed to its cut in November. The problem is that less OPEC oil doesn’t seem to be impacting U.S. supply, at least not yet.

WTIC crude plummeted to below $50/bbl on the latest stockpile number, its lowest level since early December.

Hedge funds may have seen the writing on the wall. During the last week of February, hedge funds reduced their bullish positions in Brent and WTI futures and options contracts by 61 million barrels. The oil dump was the largest weekly net oil dump by hedge funds since the first week of November.

Related Link: OPEC Oil May Be No Match For American Ingenuity

Despite the recent selloff, oil investors should take comfort in the fact that hedge funds remain roughly twice as bullish on oil as they were four months ago. As of the end of February, hedge funds had a net long position in oil of 951 million barrels compared to a net long position of 425 million barrels on November 8.

“Hedge fund managers remain overwhelmingly bullish about the outlook for prices with long positions still outnumbering short positions by a ratio of nearly 8:1,” Reuters oil & gas analyst John Kemp wrote earlier in the week. Of course, the latest stockpile data may have taken a bite out of that bullish position.

Pioneer Natural Resources PXD chairman Scott Sheffield says that WTI prices are in danger of falling to $40/bbl if OPEC opts not to extend its production cuts at some point this year.

In the past five trading sessions, the United States Oil Fund LP (ETF) USO is down 6.4 percent, the iPath S&P GSCI Crude Oil Total Return OIL is down 8 percent and the VelocityShares 3x Long Crude Oil ETNs linked to the S&P GSCI Crude Oil Index ER UWT is down 19 percent. The VelocityShares 3x Inverse Crude Oil ETNs linked to the S&P GSCI Crude Oil Index ER DWT is up 19.6 percent in that time.