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Hedge funds bet on oil rally just before Saudis give it a boost

[NEW YORK] Hedge Funds were right on the money for a second straight week as oil gets pulled in opposite directions by Donald Trump and Saudi Arabia.

Money managers increased by 5.4 per cent their net bets that West Texas Intermediate (WTI) crude would rally even as futures tumbled in the week ended Aug 6, data released Friday show. That was just in time for a 6.7 per cent price jump in the past two days after Saudi Arabia was said to mull measures to ease the rout.

A week earlier, short-sellers had boosted bets against WTI, before tweets from the US President escalated the trade war with China and tipped the oil market into its biggest plunge since 2015.

"The market seems to be slowly shifting focus form trade and all the demand concerns and now it's beginning to balance those fears," said Gene McGillian, a senior analyst and broker at Tradition Energy in Connecticut.

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"The Saudis' willingness to take steps to counterbalance slowing demand growth has basically helped stall the slide."

The Saudis were quick to act: The kingdom plans to keep oil exports below 7 million barrels a day (bpd) next month in a bid to stabilise the market, a Saudi official said Thursday. That helped ease the impact of a report Friday in which the International Energy Agency (IEA) lowered its forecasts for oil-demand growth for this year and next.

Net-length in WTI - the difference between wagers on an increase and those on a decline - rose to 177,189 options and futures contracts, the US Commodity Futures Trading Commission said Friday. Long-only bets climbed 3.5 per cent while shorts were 0.5 per cent lower.

Still, conditions aren't ripe for a big rally just yet. Net-length for WTI is near average levels for the past five years, according to Rob Haworth, who helps oversee US$151 billion at US Bank Wealth Management in Seattle.

"Unless the Saudis are able to follow through here in short order, I think the risk is really to the downside, because we haven't unwound that much of the speculation," Mr Haworth said in a telephone interview.

"As the trade spat goes on, it'll take more out of the market and therefore more out of risk-on assets like oil."

BLOOMBERG