The sound of bulls stampeding through the oil market is getting a little fainter. However, it might not be long until they're running loose yet again.
Hedge funds have increased their bets that oil prices will fall for a third consecutive week. The so-called short positions are now at their highest in about six months, as the market focuses on an OPEC meeting this month that could lead to major oil producing nations pumping more crude.
Money managers raised their short positions in U.S crude to 50,669 in the latest week, the most since the week ending Nov. 21. At the same time, hedge funds cut their long positions, or bets that U.S. crude prices will rise, to 374,904, the lowest level since the week ending Oct. 17.
The funds increased their wagers against international benchmark Brent crude to 72,430, the biggest volume of bearish bets since the week ending Aug. 1. Long positions in Brent were down for a seventh straight week at 507,705, the fewest since Sept. 5.
To be sure, the bulls still outnumber the bears by a wide margin. Earlier this year, net long positions in the most important crude oil and refined fuel futures rose to an all-time high, according to a Reuters analysis.
But for the time being, the trend is reversing as funds that trade oil futures sell into the OPEC meeting on June 22. The expectation is that top OPEC producer Saudi Arabia and Russia will agree to ease their agreement with two dozen nations to limit crude output. The deal, which started in January 2017, has helped shrink a global oil glut and restore balance between supply and demand for crude.
The news flow will likely keep pressure on oil prices as the meeting date nears, according to Tamar Essner, director of energy and utilities for Nasdaq Corporate Solutions. On top of that, OPEC has an incentive to let oil prices drift lower before the gathering, she said.
"The point is that if oil prices come down ahead of this meeting, there is less need for them to increase [production] as much because the idea was that they would increase [output] because oil prices were getting a little too heated," she said.
Oil prices have recently struck fresh 3½ year highs above $80 a barrel for and near $73 for U.S. crude. The gains have been fueled by geopolitical concern in Venezuela, which is mired in economic crisis that has hobbled its oil industry, and from Iran, where crude exports are under threat of sanctions from the United States after President Donald Trump abandoned a 2015 nuclear accord.
That's exactly why OPEC and Russia are now considering upping production: to offset declines in Venezuela and potential disruptions in Iran. Brent prices have since backed down to about $76 a barrel, while U.S. crude is hovering near $65 on OPEC supply concerns and record U.S. output.
However, hedge funds could once again reverse course right after the meeting, Essner said. The market has basically baked a one-million-barrels increase into the price of oil, and that discount could unwind if OPEC does not deliver a bigger increase, she explained.
Beyond the meeting, there is little hope for a rebound in Venezuelan production. And despite efforts by China, the European Union and Russia to salvage the Iran nuclear deal, Iranian leaders are likely to judge that they are no longer accruing enough economic benefits to stick to the agreement, which requires them to limit their nuclear program. Iran's exit from the deal, and potentially the 1968 U.N. Treaty on the Non-Proliferation of Nuclear Weapons, would once again boost the bulls.
Last week, analysts said Iran leaving the 50-year-old non-proliferation treaty would be like "rocket fuel" for oil prices and potentially spark an arms race in the Middle East, the world's busiest transit hub for oil exports.
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