Hedge Funds Make Large Bet Against Oil Prices

04/04/2016 9:40 am EST


Michael Berger

President & Founder, Technical420.com

After Saudi Arabia said that Iran must cut production if they are to participate in the production freeze proposal, money managers increased their short positions on oil and Michael Berger of Technical420.com highlights stocks that he expects to see weakness in following this announcement.

On Friday, we noted that the production freeze agreement looked less likely after Saudi Arabia said they will freeze their oil output only if Iran and other major producers did so as well.

Iran’s Oil Minister Bijan Zanganeh has said that Iran will not cut oil production and Wall Street money managers are betting against an agreement between the oil producers.

Hedge Funds Betting Against Oil Rally

According to data from the United States Commodity Futures Trading Commission, during the week of March 29, the number of short positions on West Texas Intermediate crude increased the most since November 2015.

Last week, the number of bearish bets against crude increased by 17% while the number of bullish bets decreased by more than 6%. During the week before this spike, the number of bearish positions were at a nine-month low.

This change in outlook leads us to believe that oil will remain lower for longer and several analysts are monitoring the $36.50 level for further weakness. If the price of oil breaches this level, it would signal a further downside by using the Elliot Wave theory.

Iran Plans to Increase Production

Last week, the International Energy Agency said that during its first full month of production, Iran produced 3.22 million barrels a day, a four-year high. During the month of March, Iran increased oil exports by another 100,000 barrels a day.

Iran’s Oil Minister recently said that they plan to increase production output to 4 million barrels a day, the highest level since 2008, before they will consider joining other suppliers in seeking ways to rebalance the global oil market.

Expect Weakness

While commodity price volatility should continue to act as a headwind, traders can find value by going short against energy and MLPs who possess weak balance sheets and are levered to oil basins that are not economical in this low price environment.

Some of the companies that we would look at include Pioneer Natural Resources Corp. (PXD), Chevron (CVX), and Continental Resources (CLR).

By Michael Berger President of Technical420.com

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