“Trade of the year”: Oil short sellers net billions, now will OPEC step in?

The oil price has fallen close to 10% in the first week of 2023, and is down some 30% since the highs recorded in the second half of 2022, when oil short positions soared.

Data from Clocktower Group obtained by Asia Markets and published last year, revealed shorts on oil stocks had risen to multi-decade highs, with traders betting big on an oil price collapse only months after brent crude surged to an all-time-high following the break out of conflict in Ukraine.

Oil shorts

Industry insiders now believe it’s likely some of the world’s largest hedge funds have cashed in, netting billions, with oil short interest significantly subsiding in recent weeks.

“It was the trade of the year, the China situation wasn’t priced in, few were anticipating global demand cooling so significantly. It was an emotional market blinded by conflict (in Ukraine) that no one really understood all that well, in fact we still don’t,” a Singapore-based hedge fund trader who recently closed a major oil short position told Asia Markets.

But will OPEC act?

Helima Croft, head of global commodity strategy at RBC Capital Markets believes it’s likely OPEC will ramp up production cuts should global demand continue to fall.

“While he is maintaining a poker face at the moment, the Saudi oil minister is not seemingly out of cards,” she told The Australian Financial Review.

“He has repeatedly signalled a willingness to make quick course corrections in order to ensure market stability and safeguard national interests.”

WTI Crude oil February futures are currently trading at $74.50 per barrel, while Brent crude March futures are trading at $79.43 per barrel.