With oil prices skyrocketing, hedge funds and other big investors have set up a record number of bullish bets on crude oil, which puts the market on a quick fall as the outlook worsens, analysts say.
Crude oil is trading at its highest level in more than three years, supported by the growing geopolitical risk in the Middle East and the production shortfalls of OPEC and other major producers. The global oil spill, which has helped push prices down to the decadal low, has declined and a strong global economy is expected to keep oil demand high.
Friday's Brent traded 0.1
Last week, hedge funds and other big money managers raised their net long position – a bet on rising prices – in Brent to the euro Highest since records began in 2011, according to data from
Betting on West Texas Intermediate, the US oil price indicator, is also record high, according to the US Commodity Futures Trading Commission.
These investors tend to take big positions, and many make short-term bets on oil. This could make the oil market vulnerable to a quick reversal if one of its current backers falter.
"Right now speculators simply love the oil, which is dangerous," said
an analyst at Brokerage PVM Oil Associates Ltd. "If geopolitical tensions abate, you will see a pretty strong sell-off, and if OPEC does not extend its cuts, hell will go away."
Oil has also been on the increase in recent weeks as a result of the escalating military conflict in Syria that could hit supply and falling US crude oil inventories.
The longer-term upswing in sentiment is due to the fact that the Organization of Petroleum Exporting Countries and non-OPEC allies, such as Russia, will further reduce production to meet their 2016 pricing targets.
But these cuts are due to expire by the end of this year and some investors fear that the deal will not be extended quickly, the market flooded and prices go down. The cuts have become an important pillar for the market, especially as US oil production has risen to an all-time high in recent months.
OPEC and non-OPEC ministers will meet in Jeddah, Saudi Arabia on Friday to extend their cuts until 2019. Suhail al-Mazrouei, UAE Energy Minister and provisional OPEC President said on Friday that the allies are seeking an agreement "that will last forever."
"You need to expand the deal, plain and simple," said
Chief Investment Officer of the Merchant Commodity Hedge Fund. The producers "have learned hard lessons in recent years and can not afford to go back now."
This deal has depleted inventories.
Data released by OPEC last week shows that oil inventories in industrialized countries are at their lowest levels in more than three years, based on a five-year average. After months of decline, the cartel said that inventories shrank by 17.4 million barrels in February to around 2.85 billion barrels.
How to get out of the deal – or even to stop it – without causing market fluctuations becomes a key issue for OPEC and its allies.
who manages the energy assets for Tortoise Capital Advisors said that OPEC should learn from central banks. The Federal Reserve, the Bank of Japan and most other central banks use forward guidance or verbal assurances about their future monetary policy to reduce uncertainty in the financial markets.
"OPEC should choose the central bank approach and explain its policy in the long term," said Thummel. "A longer-term alliance will calm the nerves of the market."
-Benoit Faucon in Jeddah, Saudi Arabia contributed to this article.
Write to Georgi Kantchev at email@example.com