John Kemp, Reuters

Hedge funds continued to take profits on their bullish positions in crude and especially refined fuels in the most recently reported week, but supportive comments from OPEC helped steady oil prices.

Hedge funds and other money managers cut their combined net long position in the six most important futures and options contracts linked to petroleum by the equivalent of 48 million barrels (MMbbl) in the week to Feb. 20.

The hedge funds’ net long position has been cut in each of the four most recent weeks by a total of 263 MMbbl in what has been the largest drawdown for more than seven months.

Most of the drawdown has come from the liquidation of bullish long positions rather than the establishment of new bearish short ones and it has been proportionately greater in fuels rather than crude.

Portfolio managers have cut their net long position in U.S. heating oil by 58 MMbbl, European heating oil by 45 MMbbl and U.S. gasoline by 27 MMbbl since Jan. 23. Over the same period, the net long position in Brent has been cut by 61 MMbbl while WTI is down by 71 MMbbl.

Most of this liquidation seems to be attributable to profit-taking after the big rally in oil prices over the last seven months. Few fund managers have dared to initiate new short positions. Short positions across the whole of the petroleum complex total just 137 MMbbl. Short positions in NYMEX WTI have fallen to just 30 MMbbl, the lowest since July 2014.

Fund positioning remains very stretched with longs outnumbering shorts by a ratio of almost 10:1 but down from almost 12:1 at the end of January.

Despite the profit-taking, oil prices have steadied, probably owing to a combination of strong consumption growth, a continued fall in oil inventories, and supportive comments from senior OPEC leaders.

Saudi Arabia, OPEC’s de facto leader, has confirmed that it intends to maintain production restraint throughout the remainder of 2018, even if that risks over-tightening the market.

“If we have to err on over-balancing the market a little it, so be it. Rather than quitting too early and finding out we were dealing with less reliable information ... stay the course and make sure that inventories are where the industry needs them,” the kingdom’s energy minister said Feb. 14.

Saudi officials have indicated they want to change the organization’s target for inventories from the five-year average, which is close to being achieved, to something more ambitious. This represents a significant hardening of OPEC’s policy and has partially reversed the recent slide in benchmark Brent prices, which was probably the intention.

But with the market still looking very stretched, especially on the crude side, OPEC may need to sustain its verbal intervention to reassure investors and keep prices firm.