COLUMN-Oil markets hit by profit-taking ahead of China tariff deadline: Kemp

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(John Kemp is a Reuters market analyst. The views expressed are his own)

* Chartbook: tmsnrt.rs/357podI

By John Kemp

LONDON, Dec 9 (Reuters) – Hedge funds scaled back their bets on higher oil prices last week, with futures and options markets hit by a wave of selling after a jump in positions the week before.

While much of that can be put down to profit taking, the shaky economic outlook and rapidly approaching deadline for more U.S. tariffs on Chinese goods means fund managers are likely to moderate their bullishness for the time being.

Hedge funds and other money managers sold the equivalent of 107 million barrels in the six major futures and options contracts linked to petroleum prices in the week to Dec. 3 (tmsnrt.rs/357podI).

That reversed three-quarters of the 144 million barrels purchased the previous week, according to position records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

Sales were concentrated in NYMEX and ICE WTI (-42 million barrels), Brent (-18 million) and U.S. gasoline (-26 million), with smaller sales in U.S. diesel (-11 million) and European gasoil (-9 million).

The distribution was the mirror image of the previous week’s purchases, which suggests much of the selling was driven by short-term profit-taking after a sustained rally in oil prices through most of October and November.

Positions were reported before Saudi Arabia and its partners in the expanded OPEC+ group of major oil exporters announced an agreement to deepen their production cuts in the first quarter of 2020.

The selling suggests many investors were not optimistic about the willingness and ability of the OPEC+ countries to eliminate predicted surpluses in the crude market next year.

In the event, OPEC+ surprised the market by announcing deeper than expected reductions, including a substantial additional cut by Saudi Arabia.

The surprise cut could normally be expected to prompt a fresh wave of fund buying but price reaction has been muted so far, suggesting traders see the agreement as codifying the status quo rather than removing extra barrels from the market.

Supply reductions can help eliminate the predicted surplus and support prices but the bigger question mark is over consumption next year.

Meanwhile the United States’ threat to impose a further round of tariff increases on imports from China with effect from Dec. 15 is unsettling financial markets.

The risk is for a major escalation of the trade conflict, or at best an extension to the current undeclared truce.

Until some uncertainty surrounding the economic outlook and oil consumption is resolved, it is hard to see most hedge fund managers doing anything other than limiting their bullish commitment.

Related columns:

– U.S. economy set fair for 2020, provided trade truce holds (Reuters, Dec. 6)

– Hedge funds pile into petroleum on rosier economic outlook (Reuters, Dec. 3) (Editing by Kirsten Donovan)

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