Short positions slump

There was an enormous round of short-covering last week in oil futures. Nearly 100k short managed money positions were closed last week, the largest weekly change in data going back to 2011. This helped net length gain also by the largest amount since 2011 (121k lots) as new long positions were negligible. The lack of new length shows we've largely seen a short-covering rally rather than a shift in the assessment of the market's uneven fundamentals (which we still feel are tilting toward the negative in the short-term).

The return to a bull market we've seen since the start of August has largely been on the back of comments from Khalid Al Falih, Saudi Arabia's oil minister, that the country would take "any action" to support prices and that "large short positioning" had caused the market to undershoot. How large is large? Each time a production freeze has been mooted by OPEC members as a salve for the oil market's woes WTI managed money shorts have accounted for around 40% of total managed money interest (see chart below). Last week on the back of covering, shorts accounted for about a third of total positions. The market should also be keeping its eyes on producer hedging which was at its highest since 2011 last week as the 21% rally from early August will have been too good to miss.

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