In This Bearish Environment, Why Are Pros Long Oil?

Given its lengthy bear market, mounting bearish price forecasts and the "more bad news than good news" scenario facing the oil market, it might come as a surprise to some that professional investors are not heavily short the commodity.

That is understandable when considering the United States Oil Fund LP (ETF) USO, which tracks West Texas Intermediate crude oil futures, is up 14.6 percent over the past five days. The United States Brent Oil Fund, LP BNO, which tracks Brent crude oil futures, is higher by 18.4 percent over the same period. Those qualify as “rip your face off” rallies and possibly underscore why many professional traders are not currently short crude.

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“There is a much larger closet long position now in the marketplace than is being reported on in positioning surveys. We do not find that particularly surprising ourselves, given that the exercise, much like in the stock market, has been to buy weakness or attempt to pick a bottom in crude oil repeatedly over the last 18-months,” said Rareview Macro founder Neil Azous in a note out Wednesday.

Limited Downside For Oil?

Obviously, any security can fall to zero, but some professionals may see downside as limited for oil and the likes of USO and BNO. After all, the two oil ETFs plunged an average of 45.5 percent in 2014 and 46 percent last year.

Those savage declines are not keeping investors away. Year-to-date, USO has seen inflows of over $844 million, a total exceeded by just seven other ETFs. The smaller BNO has added $17.3 million in new capital this year.

The same trend is at play with equity-based energy ETFs where the largest, the Energy Select Sector SPDR (ETF) XLE, has added $454.1 million in new assets since the start of the year amid steadily declining short interest, a sign that investors are buying XLE betting on a reversal in oil stocks. Among the nine established sector SPDR ETFs, only XLE's utilities and consumer staples counterparts have seen larger inflows this year.

“Sight on the froth in short positioning being removed we would argue that, outside of model-driven strategies (CTA) and credit funds, the position in the speculator community now is a lot more balanced,” added Azous.