Oil Spurred By Hedge Fund Short Covering

New York (HedgeCo.net) – Oil has rallied 13.6% in the last two weeks after falling below the $40 per barrel price for a few days. Interestingly, the price of West Texas Intermediate Crude has not close a month below $40 a barrel since June 2004 and August was no exception.

The recent rally can be partially attributed to short covering by hedge funds as they had built a short position equivalent to 163 million barrels on August 11 and that short position had been cut to 136 million as of September 1. While the total number of contracts sold short has declined, according to a report from Reuters the number of funds with reportable positions actually increased last week, but the size of the positions dropped by nearly 20%. The average short position has been reduced by approximately 30% since the beginning of August.

Hedge funds had built a similar short position back in the first quarter before oil rallied from the $45 range up to the $60 range. Given how high the short positions still are, the rally might not be over just yet.

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Pramod Baviskar

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