* Big speculators fled from oil market as prices tumbled
* Net position cut by a third as longs liquidate, shorts surge
* Drop in net longs 50 pct larger than previous record in 2010
By Jonathan Leff
NEW YORK, May 11 (Reuters) - Hedge funds and big speculators made the biggest-ever cuts in their bullish bets on oil, according to weekly regulatory data on Friday that will put a new perspective on the market’s sudden price rout late last week.
Money managers slashed their net long futures and options positions in the major U.S. crude oil contracts to nearly their lowest since 2010, cutting them by 81,674 lots in the week to May 8, a drop of more than one-third, the U.S. Commodity Futures Trading Commission’s (CFTC) data showed.
At current prices, that’s a decline of nearly $8 billion worth of oil contracts.
The collapse, which was caused both by bullish speculators closing out long positions and by bearish traders opening new short bets, coincided with this year’s biggest drop in prices, one that rattled traders in its abruptness and because it came one year after a similarly unusual $10 dive on May 5, 2011.
While the more than 8 percent drop in prices in the week to May 8 was initially pinned on a range of factors from poor U.S. jobs data to technical trading triggers, the CFTC data now suggests that it was also likely also fueled by the most significant fund repositioning since the financial crisis.
The sell-off comes amid recent news that a handful of major energy hedge funds are winding down, including John Arnold’s gas-focused Centaurus, which had $2 billion of outside funds, and London-based BlueGold, which was over $1 billion.
The CFTC does not release the identity of traders.
Joachim Azira with Credit Suisse Commodities Research said the dramatic reversal in the market may have been caused by speculators who were betting that the lowest volatility in years would continue. The rout caused volatility to spike.
“The sell off started on Wednesday last week and continued through Friday when previously complacent investors with long positions started running for cover,” he said.
Tom Bentz, director at BNP Paribas Prime Brokerage Inc in New York, said confusion over a possible one-third hike in initial margins for NYMEX members -- later postponed by 90 days -- also likely “shook out more length.”
U.S. crude oil prices on the New York Mercantile Exchange (NYMEX) dived more than 7 percent in the last three days of last week, and carried on falling in the first part of this week. Over the five days to May 8, prices fell by 8.6 percent, more than $9, undercutting confidence in this year’s rally.
Dealers were mixed on what the data suggested for the outlook, which has been clouded by new uncertainty over the global economy and signs that tougher sanctions on Iran were not yet straining the world’s oil supplies.
“Earlier in the year, there were a lot of excuses for keeping prices up. All those reasons are gone now and it’s harder to stay long,” said Phil Flynn, an analyst at PFGBest Research in Chicago.
Tim Evans of Citi Futures Perspectives agreed that the bearish flow would likely continue, but offered an upside.
“This purging of excess length will eventually set the stage for a new cycle of buying, but it could take a period of weeks before that emerges,” Evans said in a note.
Hedge funds, which had boosted their net longs the previous week just ahead of the oil market’s biggest decline this year, were net long 153,725 lots by May 8, the data showed.
The decline was the largest in the agency’s disaggregated series, which begins from 2006, according to NYMEX only data. It was 50 percent bigger than the previous record from early 2010.
Only once since 2010 has the net position fallen below this level, according to Reuters calculations based on the data, which aggregates both CME Group and IntercontinentalExchange positions.
The drop in the net position was the result of both a huge 43,587-lot sell-off in NYMEX long positions as well as a 28,238-lot increase in short positions, pushing bearish bets to the most since last October, according to the data.
Other trader groups showed less significant changes in crude oil markets. Swap dealers -- mainly big banks -- cut their net short position NYMEX position by 31,000 lots, the biggest move in a year, but their positions were still larger than any point prior to February, the data showed.
The “end-user” group of producers, consumers and merchants also cut their net short by a larger than usual 15,695 lots, further paring their holdings to the smallest since at least 2009, an indication that oil companies are in no rush to lock in current prices that they expect are more likely to rise.