Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Oil investors just know that they are right. And this week, more than usual, that is at once the most reassuring and dangerous feeling to have.

OPEC meets on Friday and is widely expected to do little more than talk about the need to stabilize -- read "increase" -- prices without actually doing much about it. This is with good reason: amid heightened, and stubborn, competition from rival producers, OPEC has lost its power to control the market, at least for now. Better to keep pumping and claw back market share.

Hedge funds broadly concur. Short positioning in Nymex light, sweet crude oil futures and options by "non-commercial" participants -- speculators, essentially -- has jumped back almost to its March peak and is more than double the average for the past decade. 

The Short Story on Oil
Short positioning in light, sweet crude oil by hedge funds has surged.
Source: Bloomberg

A supply glut that looks set to persist through at least the first half of next year means the consensus looks correct.

Crowds have their own peculiar wisdom in a market as jumpy as oil, though. Take a look at the next chart, which indexes the change in the net positioning of hedge funds in oil versus the price (the lower the "net position" line, the more bearish it is).

Setting Up the Squeeze
Net speculative positioning vs. the price of oil, indexed to 100
Source: Bloomberg

Notice how bearishness hit its deepest points in March and August just before oil prices staged sudden rallies of more than 20 percent each time. Now, with hedge funds back in the pits when it comes to sentiment, the chances of another short squeeze reinflating oil prices have risen again. All it might take are a few choice words from, say, Saudi Arabia’s oil minister or the promise of an interim meeting early next year to set short sellers scrambling.

Any such rally would be brief. Still, it might give struggling exploration and production firms a brief window to hedge more of next year’s output, allowing them to keep delaying the steep cuts in production that low prices must force eventually. For that very reason, silence could be golden for OPEC this week.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Liam Denning in San Francisco at

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Mark Gongloff at