John Kemp is a Reuters market analyst. The views expressed are his own.

By John Kemp
London


Hedge funds and other money managers had amassed short positions in US crude oil amounting to 154mn barrels by last Tuesday according to data from the US Commodity Futures Trading Commission (CFTC).
Short positions have increased more than 70% since the middle of October and stand at the highest level since August, the CFTC showed in its latest commitments of traders report published on Friday.
The number of hedge funds with reported short positions of at least 350,000 barrels in the main WTI contract on the New York Mercantile Exchange hit 69 last week, the largest number since April.
The average hedge fund short position has increased from 1.6mn barrels in mid-October to as much as 2.2mn barrels last week.
Since the start of the year, movements in the price of WTI futures prices have been closely correlated with the accumulation and liquidation of hedge fund short positions.
Recent lows in WTI in March and August coincided with a large concentration of hedge fund short positions (178mn and 157-163mn barrels respectively) and a large number of reported short traders (78 and 65-66).
The large increase in short positions over the last five weeks confirms how bearish many hedge fund managers have become about the outlook for US crude as stockpiles continue to increase and US weather remains mild.
The major commodity dealing banks almost all remain bearish about US crude prices in the short term, seeing a further dip into the $30-40 range as necessary to accelerate the rebalancing of the market.
Previous dips in the WTI price in April and August both ended with sharp short-covering rallies once the downward momentum faded and fund managers tried to reduce their positions and lock in profits.
With the hedge funds now heavily invested in the short narrative, the risk of reversal is increasing again.