John Kemp, Reuters

Hedge fund managers have turned bullish again toward oil prices, casting aside the caution that prevailed during much of February and March.

Hedge funds and other money managers increased their net long position in the six most important futures and options contracts linked to petroleum prices by 85 million barrels (MMbbl) in the week to March 27.

Portfolio managers have increased their net long position in Brent, NYMEX and ICE West Texas Intermediate crude, U.S. gasoline, U.S. heating oil and European gasoil by a total of 180 MMbbl over the two most recent weeks.

Net long positions stood at 1.396 billion barrels (Bbbl), not far below the record 1.484 Bbbl set nine weeks ago on Jan. 23. Fund managers’ long positions outnumber their short ones by a record ratio of 12.5:1, according to an analysis of records published by regulators and exchanges.

On most measures, portfolio managers’ positioning in crude and refined products looks increasingly stretched and lopsided.

Large concentrations of positions such as this, on either side of the market, have typically preceded a sharp reversal in prices since the start of 2015.

With so many long positions already established and few short positions left to cover, there may not be much more buying to support prices if the holders of existing longs try to realize some of their profits. But the same risk factors have been evident for the last three months and so far prices have been steady with little day-to-day volatility.

Most hedge fund managers seem convinced the next major move in prices is more likely to be on the upside.

OPEC has signaled its willingness to continue supporting prices by indicating it will extend output curbs through the end of 2018.

Venezuela’s output continues to fall as a result of internal unrest and mismanagement, while Iran’s exports are threatened by the possible reimposition of U.S. sanctions.

U.S. shale output is rising rapidly but the rig count has levelled off in recent weeks, which some analysts have seen as a sign of increased capital discipline that should moderate further gains in production.

At the same time, synchronized global growth and moderate oil prices are fueling brisk growth in consumption, which is forecast to increase by more than 1.5 MMbbl per day for the fourth year running.

The biggest source of uncertainty is now on the demand side, where the macroeconomic cycle is rapidly maturing, interest rates are rising, and increasing protectionism is clouding the outlook.

While the oil industry’s recovery seems to be mid-cycle, the macroeconomic backdrop appears to be much later in the cycle, with an increasing risk of a slowdown arriving by 2019 or 2020.

For now, though, almost all hedge fund managers expect cyclical momentum to carry oil prices higher in the short to medium term.