Saudi Arabia successfully confounded hedge funds with bearish views on oil by reaching an unexpected production deal with OPEC members in Algiers on Sept. 28, sending prices soaring in a short-covering rally.
Hedge funds and other money managers increased their net long position in the three main Brent and WTI futures and options contracts by a record 142 million barrels over the seven days ending on Oct. 4.
Hedge funds’ net position surged from 471 million barrels on the eve of the OPEC meeting to 612 million barrels seven days later .
Short positions were cut by 69 million barrels while an extra 73 million of long positions were added, according to an analysis of data from regulators and exchanges. The surprise agreement sent front-month Brent prices climbing by $5-6 per barrel as hedge funds scrambled to close out losing short positions and add longs to capitalise on the rally’s momentum.
The Algiers agreement marked a sharp turning point in market sentiment towards oil which had been deteriorating over the previous month.
Between late August and mid-September, hedge funds had cut their net long position in Brent and WTI by 178 million barrels (from 628 million to 449 million).
The Algiers agreement almost exactly reversed this shift and has more or less returned the oil market to the position that prevailed in late August.
Front-month Brent futures closed at $50.87 per barrel on Oct 4, essentially back to where they were on Aug. 23, when they stood at $49.96.
Did Saudi Arabia deliberately set out to squeeze hedge funds with bearish bets? The question is impossible to answer without knowledge of private discussions within the petroleum ministry and royal court.
But whether the squeeze was intentional or not, the practical impact was the same, and triggered a furious short covering rally.
There were still a fairly large number of short positions uncovered on Oct. 4, which likely explains why prices continued rising over the next few days.
But with short positions now sharply cut, and the net long position within 51 million barrels of its record level of 663 million barrels set back in April, the scope for further short-covering is much reduced.