John Kemp, Reuters

Hedge funds had turned more bullish on the outlook for petroleum prices, even before the decision to replace the U.S. president’s national security adviser with an anti-Iran hawk was announced March 22.

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 95 million barrels in the week to March 20.

The combined increase was the largest since the end of October and reversed a draw of 73 million barrels (MMbbl) over the two previous weeks, according to records published by regulators and exchanges.

Fund managers now hold a net long position of 1.311 billion barrels (Bbbl) across Brent, NYMEX and ICE WTI, U.S. gasoline, U.S. heating oil and European gasoil.

The combined net long position is 170 MMbbl below the record 1.484 Bbbl set on Jan. 23 but more than four times higher than the recent low of 310 million set at the end of June 2017.

Hedge fund positioning remains extremely lopsided, with almost all funds expecting prices to rise further rather than fall.

Portfolio managers hold 11.7 long positions for every short one, the second-highest ratio on record after 11.9 on Jan. 30.

Almost no one seems willing to bet against the trend. Short positions across the complex have declined to just 122 million barrels, the lowest level since May 2014.

In some parts of the complex, positioning has become even more extreme. In U.S. gasoline, for example, long positions (94 MMbbl) outnumber short ones (4 million) by a ratio of almost 22:1.

The current positioning across the complex is a classic example of a market that has become “locked” with all traders trying to position themselves the same way.

Locking often precedes a sharp reduction in liquidity, an increase in volatility and an eventual reversal in the price trend.

Extreme one-way positioning could herald a shift in oil prices into a new, higher trading range, such as happened in fourth-quarter 2017.

But with so few speculative short positions remaining to be covered, there may be few buyers around if and when the holders of long positions decide to realize some of their profits and try to sell them.