From Citi:
The oil bears look to have taken perhaps their final fling as money manager net positioning as a percentage of open interest fell to ~7% and just ~1% above the all-time low in 1Q’16 when oil prices fell below $30/bbl. Money managers have a record level of short positions open on ICE Brent contracts at ~170-k lots whilst short positions on NYMEX WTI are ~50-k lots shy of the all-time high. In addition, long positions on both Brent and WTI are around a similar level to end-Jan-16 when oil prices were at their recent history lows. That’s not to say that investor net length can’t go lower but we think this is unlikely, especially given how short-lived aggressive short selling has been in oil markets historically.
Beyond financial positioning, price determination in oil markets is typically a combination of supply/demand fundamentals (both current and future) and geopolitics in addition to financial flows. Currently, the three way struggle for price determination is being dominated by financial flows, with the bears now winning, as market fundamentals appear confusing whilst geopolitics loom as a bullish factor in the background. A bottom in the oil price is likely near however as positioning is now very light. With a flatter futures curve (relative to the 1Q’16 crash), deferred crude futures are now low enough to yield a meaningful change in 2018 balance expectations; Dec-18 WTI is now ~$46.
