The long and short on the stunning drop in oil prices – by Eric Reguly (Globe and Mail – October 9, 2014)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

ROME — The commodities markets can work in mysterious ways, and oil is certainly doing that now. While the common assumption is that the speculative short positions held by the hedge funds are overtaking the market, they are in fact greatly outnumbered by the speculative long positions. That means more hedgies hope to profit from rising prices than falling ones.

That’s a brave bet when oil prices are in something close to freefall. As oil prices plunge, it is the longs, not the shorts, who are looking vulnerable.

In late September, the speculative long positions on U.S. oil prices – West Texas intermediate (WTI) is the benchmark – was about 420,000 contracts (each contract represents 1,000 barrels). The short positions amounted to only about 130,000 contracts, putting the net speculative long position at 290,00 contracts. That net position is extremely high, historically speaking. What do the longs see that the shorts do not? They could be gambling on an imminent bounce-back in prices. Or they could be dead wrong.

To be sure, the oil glut in North America is not as extreme as it appears elsewhere on the planet; fed by surging shale oil production, newly expanded refineries in the United States are running flat out and exporting a lot of their output, narrowing the traditional price gap between WTI and Brent crude, the latter being the effective global benchmark. But the overall picture has not been encouraging for traders who are betting that oil prices will reverse themselves.

On Wednesday, prices for WTI and Brent fell again, by more than 1 per cent each. The collapse of Brent has been a stunner. The price for November deliveries was just below $91 (U.S.) a barrel, for a one-year decline of 17.5 per cent. All of the decline has come since July.

In early 2012, when the Western world was climbing out of its deepest economic downturn since the 1930s, Brent was trading at about $125. In early 2008, before the financial crisis, the price went as high as $147 and Goldman Sachs predicted that $200 was credible as the “peak oil” theory seemed on the verge of becoming a nasty reality.

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