Hi energyplay, perhaps it is time to gradually add to existing underweight positions, as the specs leave, oblivious to underlying monetary trends ...
Commodity hedge funds change from bulls to bears
By Kevin Morrison
Published: April 16 2003 5:00 | Last Updated: April 16 2003 5:00
news.ft.com
Hedge funds have sold many of the large positions they accumulated in recent months in oil, gold, platinum and natural gas, and they are now betting that prices in these commodities will fall further.
Hedge fund positions in oil and precious and base metals had contributed to the sharp price gains made in the run-up to the conflict in Iraq. Now, with the end of the conflict in sight, these positions have been unwound and prices have fallen back to their levels at the start of the year.
More than $5bn worth of long positions in US oil and gold futures are estimated to have been sold since early February, according to the Commodity Futures Trading Commission.
Kevin Norrish, head of commodities at Barclays Capital, said this was a record sell-off. "We saw the unusual situation of having net long positions across all commodities, which rarely ever occurs and I doubt if we will see it again," he said.
CFTC data show that hedge fund positions in oil, natural gas and copper have switched from net long positions, which indicate that funds expect prices to rise, to a net short positions, which indicates that funds expect prices to fall.
Only their positions in gold remain long, indicating their expectations that further price rises in the precious metal could be on the cards.
Speculative investors were holding more than 100,000 net long positions in Nymex crude and oil products futures and options contracts in the first week of February, which equates to orders to buy about 100m barrels of oil, or about four days' worth of Opec production. Now, they hold a net short position of 12,908 contracts.
Funds started to unwind their holdings in oil throughout February as the underlying front-month Nymex contract sailed to a post Gulf-war high of $39.99 a barrel on February 27.
The sell-off accelerated in early March with about 27,000 long positions sold in the week after the oil reached a 12-year high.
US natural gas futures were also subject to large movements in both speculative interest and record prices in the first quarter.
The combination of a cold winter in the US, low storage levels and transport interruptions helped push the price of US natural gas futures to an all-time high of $11.89 per million British thermal units at the end of February. That compares with an average price of a little more than $3 last year, and the current price of about $5.40.
Speculative investors in US natural gas futures held long positions numbering more than 54,000 in early February or three times the amount held in short positions at the time.
Since then investors have sold almost 60 per cent of their long positions in Nymex natural gas futures and options, while short positions have risen by a similar magnitude.
In addition, the number of investors holding gold futures contracts both long and short on Comex, which is owned by Nymex, have halved since gold hit a six-year peak of $388.50 a troy ounce on February 4.
John Reade, precious metals analyst at UBS Warburg, said that, at the peak, Comex gold futures positions accounted for about 14m ounces, or about 10 per cent of annual supply and demand globally.
The liquidation of gold futures is one of the factors behind the precious metal's price fall to a four-month low last week of $319 an ounce, although it has since partly recovered to $325 an ounce.
However, investors remain net long in gold, suggesting that the price could rise as it benefits from lingering political uncertainty surrounding the war in Iraq and sluggish global economic growth.
Mr Reade said that speculative interest from Japanese investors was high in early February, with 4.5m worth of long positions on the Tokyo Commodity Exchange (Tocom), compared with 2.5m at present.
Platinum's rise to a 23-year high of $707 an ounce on March 10 was again helped by speculators in the US and Japan.
Copper, which unlike gold and oil is more closely correlated with the global economic performance, was also well sought after, with more than 35,000 long positions held in early February. Now, long positions are fewer than half that.
At the same time, the number of short positions has risen fivefold to more than 24,000, indicating that the risk is on the downside for copper prices.
Copper reached a 10-month peak of $1,760 a tonne on February 3, about $180 above the current level.
"The interest in copper reflected the fact that investors were looking at commodities as an alternative to equities," said Mr Norrish from Barclays. |
