(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chart 1: http://tmsnrt.rs/2qGJbP8
* Chart 2: http://tmsnrt.rs/2rI6bMg
LONDON, May 22 (Reuters) - Hedge funds have started to rebuild bullish long positions in crude oil as OPEC prepares to extend its production cuts for an additional nine months.
Hedge funds and other money managers increased their net long position in the three major futures and options contracts linked to Brent and WTI by 6 million barrels in the week to May 16 (http://tmsnrt.rs/2qGJbP8).
While the increase was small it marks a turnaround after three consecutive weeks in which funds had reduced their net long position by a total of 308 million barrels (http://tmsnrt.rs/2rI6bMg).
There were sharply contrasting views in the market about where prices would go next in the week between May 9 and May 16.
Bullish hedge funds increased long positions in Brent and WTI combined by 28 million barrels, according to data released by regulators and exchanges.
But bearish hedge funds also increased short positions by a combined 22 million barrels over the same period.
The picture that emerges is complex, but the short-selling cycle which started around the middle of April seems to have run its course (Hedge funds turn bearish on oil and refined fuels, Reuters, May 8).
Combined Brent and WTI short positions increased by just 22 million barrels in the week to May 16 compared with 71 million in the week to May 9 and 65 million in the week to May 2.
By May 16, combined short positions had reached 356 million barrels, up from 162 million on April 18 and the highest since the middle of November, before OPEC announced production cuts on Nov. 30.
The large concentration of short positions left prices vulnerable to a short-covering rally in the event fund managers decided to close some of them and take profits.
Some fund managers had already begun to build long positions in anticipation of just such a short-covering rally.
In this context, the joint statement from Russia and Saudi Arabia issued early on May 15 fuelled the short covering and accumulation of fresh long positions.
By recognising the need to extend production cuts and pledging to do whatever it takes to bring stocks down to the five-year average, the statement increased risks for short sellers and emboldened the bulls.
With the OPEC meeting on May 25 approaching, at least some funds have probably started to reduce short positions just in case the organisation surprises the market.
Fund managers have tried to position for the small but non-zero probability OPEC announces deeper output cuts (OPEC nears decision time: rollover or deepen cuts? Reuters, May 19).
Updated position data will not be published until Friday, but the continued rise in both Brent and WTI prices in recent trading sessions strongly suggests many short positions have now been closed.
The critical question for the market, however, is how many still remain open and could still be squeezed if prices continue rising? (Editing by Susan Thomas)