Hedge fund managers accelerated their profit-taking in crude oil and refined fuels last week, as confidence in the previous price rally faltered and the market fell. 
Hedge funds and other money managers cut their combined net long position in the six most important petroleum futures and options contracts by 133mn barrels in the week to October 16.
Fund managers have cut their combined position by a total of 187mn barrels in the last three weeks after earlier raising it by 196mn barrels in the previous five weeks.
Funds now hold a net position equivalent to 912mn barrels, the lowest since August 21 and before that September 2017, and far below previous peaks of 1.4bn in April and almost 1.5bn in January.
Liquidation of old long positions again led the change last week (-119mn barrels) while the number of new short positions increased only slightly (+14mn barrels). 
Portfolio managers reduced their net long positions in Brent (-66mn barrels), NYMEX and ICE WTI (-37mn), US gasoline (-15mn), US heating oil (-6mn) and European gasoil (-9mn). The combined reduction in net long positions was the largest in any one week since the middle of July and before that the middle of February. 
As a result, the ratio of bullish long positions to bearish short ones slipped below 8:1, down from a recent high of more than 12:1 at the end of September.
While most of the adjustments came from the long side of the market, fund managers boosted short positions in NYMEX WTI by 16mn barrels.
The one-week increase in NYMEX WTI short positions was the largest for 52 weeks and took the total number of short positions to its highest level since November 2017.
Fund managers’ NYMEX WTI short positions have jumped by 35mn barrels over the last seven weeks, in what is starting to look like the start of the first new short-selling cycle for over a year.
Lingering concern about the impact of US sanctions on Iran’s exports and the availability of crude oil has helped to keep many fund managers long.
But doubts about the state of the global economy and the outlook for oil consumption in 2019 are weighing on oil prices as well as equities.
Saudi Arabia’s international position has weakened after journalist Jamal Khashoggi was killed inside its consulate in Istanbul, leaving it reliant on goodwill of the United States.
The prospect of diplomatic isolation makes it more likely Saudi Arabia will pump extra oil and try to keep prices lower than before to protect relations with the United States.
Even before the Khashoggi crisis, the White House had made clear that it expects Saudi Arabia to pump more oil to compensate for the loss of exports from Iran and keep prices below $80 per barrel.
Finally, with spot prices and calendar spreads coming under pressure, the incentive for fund managers to realise some profits after the previous rally has sharpened, and the liquidation has become self-fulfilling.
From a positioning perspective, the hedge fund community’s stance now appears less lopsided than at the end of September.
Some of the liquidation risk that was hanging over the market has been removed because it has already been realised.
But fund managers are still fairly long of crude and refined products and the fundamental outlook appears more uncertain than before.


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