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April 12, 2018

Net long oil position continues to decline – bearish sign for oil?

Net long oil position continues to decline – bearish sign for oil?

Hedge funds keeps scaling back wagers on oil growth after a two-week break. Swap dealers do not lag behind.


Hedge fund portfolios had 461,8 thousands long contracts and 37,6 thousands short contracts in the week ending in April 4. So the total net long position for crude shrunk to 424.3 thousand contracts, which is 43.8 thousand contracts less than a week earlier. The gap between the record volumes set at the end of January rose to 71.9 thousand contracts.  Commodity swap activity from the swap dealers accounted for the respective cut of hedge funds longs – the amount of their shorts fell by 17.6 thousand contracts. Usually swap dealers open more short contracts when they expect prices to appreciate, since they swap fixed cash flow payments for a variable cashflow from a counter party. In other words they take commodity swap fixed leg obligation while demanding from the buyer to pay according to the current oil price.

In turn, small speculators are still expect prices to rise – their net “long” for “black gold” increased by almost 5 thousand contracts to 25 thousands.


Hedge funds net long position



If the guidance is in the hands of hedge funds, then prices may resume drop after recent gains, and if the initiative is in swap dealers, then price may extend growth further.

Considering that oil prices have been growing in the past two and a half years, it is possible to assume with a high degree of probability that some of the funds still wanted to fix their profits, especially after the climb up stalled. At the same time, over a year and a half, swap dealers benefited from price gains to offer more short positions. They still do not earn but lose, so the desire to close their “shorts” should diminish.


Some thoughts on Dollar


After the worsening market fears because of the trade spat between the US and China and also rather weak data from the US labor market, the dollar lost the positions that it won recently. But will it maintain bullish impulse?

The dollar index (DXY) by the evening of Friday was at the level of 89.78 points, again falling below 90 points. Recall that in the range of 88-91 points DXY has been traded for a long time – almost from the beginning of this year.

The current delay in growth occurs amid the rising spread between the LIBOR rate and the effective Fed rate as recently it’s been moving steadily upwards.

The growth of differential between the rates began in the summer of last year, and at the beginning of the current year the pace of its growth quickened. Firstly it was due to the more hawkish policy of the Fed, which continues to stick to normalization path. Secondly, the more significant factor, in my opinion, is the deflation of Fed’s balance sheet. This topic has been actively discussed in the media since the beginning of the summer of 2017, and in October the central bank took a first step in this direction.


Libor Fed yield differential



Increased LIBOR rates suggest that greenback liquidity shrinks in the Europe and in the world which leads to its deficit. The signs of loosening connection with Fed funds rate will imply higher borrowing costs outside of US or in other words more expensive dollar.

So far, the lack of dollars is not so significant, but this trend may proliferate and the Fed’s actions to reduce the balance will eventually lead to a more visible deficit of the greenback. As a result, this unlocks upward path for USD and the dollar will feel much stronger than its main rivals.

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