Tranquil Oil Market May Be Due a Jolt as Positioning Stretched

  • Bets on higher oil price a ’crowded, one-sided trade’: Citi
  • Little room for realized volatility to trend much lower

The calmness in the oil market is disquieting.

Volatility is lingering near a two-year low and hedge funds continue to ramp up their bullish bets on the price of crude. Some are beginning to worry.

“We see the potential for a sharp liquidation event this quarter,” Citigroup Inc. analysts, led by Aakash Doshi, said in a recent note to clients. “Stretched oil longs could trigger a squeeze in a crowded one-sided trade and crude volatility also seems too low.” They also highlight deteriorating short-interest in crude-focused exchange-traded funds.

The longest losing streak in oil in more than a month is already raising speculation that increasing supply from U.S. shale producers is offsetting the effects of cuts by OPEC. Still, the OIV index, a gauge of volatility in the West Texas Intermediate crude market, remains close to levels not seen since 2014.

Citi isn’t alone in its concerns. Commerzbank AG, in a note to clients this week, highlighted pointers of increasingly negative sentiment toward oil, despite the sizable net long positioning of speculative investors. “The sell signal for oil has become more pronounced.”

Recent data show the gulf between hedge funds’ bets on a oil-price increase and those on a decline is at it widest since at least 2006.

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