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Analysts suggest that there has been an increase in short positions in oil, indicating a belief that prices will decline.
This development raises the likelihood of unexpected decisions by producers at the upcoming OPEC+ policy meeting on June 4.
Short sellers engage in activities aimed at profiting from price drops, such as selling borrowed assets to repurchase them at a lower cost. However, when an unanticipated OPEC+ production cut leads to a surge in oil prices, these sellers incur losses.
The Organization of the Petroleum Exporting Countries and Saudi Arabia, the leading producer, have consistently attributed volatile oil price fluctuations to speculators. Saudi Energy Minister Prince Abdulaziz bin Salman has vowed to punish them.
According to a recent report by Standard Chartered bank analysts, speculative short positions in crude oil now mirror the bearish sentiment observed at the beginning of the pandemic in 2020, when oil demand and prices collapsed.
The analysts assert, “We believe that the recent surge in short positions significantly raises the chances of further production cuts during the OPEC+ meeting.”
Ole Hansen, the head of commodity strategy at Saxo Bank, notes that speculators have recently increased their gross short position in U.S. crude and Brent to levels close to those seen before April 2. On that date, Saudi Arabia and other OPEC+ members surprised the market with an announcement of output reductions.
This move resulted in a 6% surge in Brent crude, reaching almost $85 per barrel when trading resumed on April 3. However, the price declined in subsequent weeks as traders became concerned about demand and economic growth.
On Tuesday, the Saudi minister’s warning indicated his potential to inflict more damage on short sellers, cautioning them to “watch out.” Notably, this warning came just days before the upcoming OPEC+ meeting, which coincides with a weekend when the market will be closed.
Hansen remarks that the minister’s comments reflect “the current frustration about the market and the influence of short sellers, which have made a strong comeback during the past month.”
In response to the minister’s statement, some short sellers might reconsider their positions, suggests Hansen.
However, Craig Erlam from broker OANDA believes that short sellers might be enticed to maintain their positions.
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