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The liquidation of hedge fund positions followed by a sharp drop in oil prices is consistent with empirical and theoretical work on price dynamics.
Significant liquidation often starts before a sharp drop in oil prices (“Why stock markets crash: critical events in complex financial systems”, Sornette, 2003).
The initial liquidation is orderly but accelerates as more and more position owners rush for the exit at the same time (“Predatory trading and crowded exits”, Clunie, 2010).
Pierre Andurand, one of the most prominent bullish hedge fund managers in oil, reportedly liquidated his last remaining long positions during the final week of April, before the price rout on May 4 (“Oil bull Andurand closes bet on rally”, Reuters, May 5).
Given the further sharp decline in oil prices it is very likely hedge fund managers have cut their net long position even more since May 2.
The elimination of so many long positions has left the oil derivatives market looking more balanced than at any time since November, which could ease some of the downward pressure on prices.
And short positioning has also increased to a relatively high level of 263 million barrels across Brent and WTI which leaves the market vulnerable to a short-covering rally.
Overall, hedge fund positioning in oil now appears neutral. What happens next, whether the funds turn bullish again or become more bearish, depends largely on what happens to oil inventories over the summer.
Wouldn't touch oil with a 10 foot pole right now. Inventory is staying high and rig count keeps going up, the second oil hits $60+ it's going to get drowned back down immediately as producers uncap all of the wells they are currently drilling and capping. The oil industry is in a cannibalistic cycle that only explosive economic growth somewhere, anywhere in the world, can get it out of at this point - and that's a whole separate issue in and of itself. There's a big hole to climb out of in the years to come.
In 2008 people were arguing that it wouldn't go any lower *ever*. Then it fell from $150 to $30.
Now it's "it won't ever go any higher, this is the best it will get".
"Investing" in commodities on in companies directly hinged to them is always a crap shoot. Your entire return hinges on world events that not even entire nations can control.
Lots of competition out there. Russia, Iraq, US shale oil production, etc are keeping oil prices low. With electric cars having some toehold in the market I don't see oil going up anytime soon. At least not to $130 a barrel.
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