Oil has shortsellers on the run, helping fuel a new year rally

New York

OIL'S rally is driving doubters out of the market, with hedge funds abandoning more than half of their shortselling bets in just four weeks.

With Brent crude enjoying its best month in almost three years, money managers slashed bearish bets on the global benchmark price by another 27 per cent in the week ended Jan 29, data showed on Friday. The flight of the pessimists continued to be a dominant factor in oil's rebound, with bets on a price increase rising by only 4.5 per cent.

"When you see the shorts throwing in the towel like this, you know that's been a big part of the lift we've seen," said Bill O'Grady, chief market stra-tegist at Confluence Investment Management in St Louis. "We've clearly covered a lot of the shorts. Now you're going to need some more bullish information to attract the long money."

Whatever the driver, oil's been on a tear. After fears of a global oversupply tipped Brent into a 42 per cent nosedive late last year, the commodity has already regained almost half of that ground. Supply cuts led by Opec and Russia have provided much of the momentum, along with enough encouraging economic data to ease the panic that gripped markets in the last few days of December.

Brent closed at US$62.75 a barrel on Friday, its highest in more than two months, after reports showed Saudi Arabia cut production even deeper than pledged in January while US explorers ended the month by idling more drilling rigs.

Hedge funds increased their net long position on Brent by 15 per cent to 232,703 options and futures contracts, the ICE Futures Europe exchange said on Friday. Shortselling wagers fell to their lowest point since late October, just a few weeks after oil had reached a four-year high.

Sceptics can point to US oil production that's broken successive records in recent months and the still unresolved trade dispute between the US and China. Still, the rally's momentum is undeniable. West Texas Intermediate crude has jumped 30 per cent since Christmas Eve, settling above US$55 a barrel for the first time since November.

"Funds like big round numbers," said Bob Yawger, director of the futures division at Mizuho Securities USA. "You had a lot of people pulled into the market at US$55. You may get another wave at US$55.50. No one wants to say they've missed that." BLOOMBERG