Oil bears are cashing out.
Hedge funds slashed short positions in West Texas Intermediate by 13 percent in the week ended Sept. 1 as the largest three-day rally in 25 years sent crude up by almost $10 a barrel before it dropped again. It was the biggest liquidation of bearish bets since May.
The week made for a wild ride in the crude markets as volatility jumped to a five-month high amid anxiety about a stubborn worldwide glut of crude. Rising production from Iran and the U.S. combined with weaker demand from China put an end to three days of gains on Sept. 1, the last day of the report week, as oil plummeted 7.7 percent.
“There’s a lot of nervousness in this market,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Everyone is retrenching in the face of this extreme volatility.”
Money managers cut short positions, or bets that prices will fall, by 21,009 futures and options combined, U.S. Commodity Futures Trading Commission data showed. Net-long positions increased by 16,826 contracts as bullish wagers also declined.
“We’re seeing some short covering along with long liquidation, which means that money is moving out of the market,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York, said. “Investors are moving to the sidelines, which is an appropriate response given the volatility.”
The U.S. benchmark oil contract advanced 16 percent in the report week to $45.41 a barrel on the New York Mercantile Exchange. WTI started the seven-day period at $39.31 before the largest three-day rally in 25 years sent futures up 27 percent to $49.20. The contract lost 21 cents to $45.84 a barrel at 12:18 p.m. Singapore time on Monday.
On Sept. 1, oil tumbled by $3.79 a barrel after a report showed manufacturing in China had slowed. Investors redeemed a record 13.8 million shares from the U.S. Oil Fund, the most since the exchange-traded product started trading in 2006. That forced the fund’s managers to liquidate the bullish oil contracts that back its shares.
Crude has declined 51 percent in the past year as rising output from the U.S. and the Organization of Petroleum Exporting Countries outpaced demand growth. Prices will remain at $40 to $60 a barrel into 2016, said Ian Taylor, chief executive officer of Vitol Group BV, the world’s largest independent oil trader.

Other Markets

In other markets, net bullish bets on Nymex gasoline slid 18 percent to 16,383, CFTC data show. Futures fell 3 percent to $1.3956 a gallon. Net bearish wagers on U.S. ultra low sulfur diesel contracted by 14 percent to 28,822 contracts. Diesel futures advanced 13 percent to $1.5779 a gallon.
U.S. crude output is 6.8 percent higher than a year ago even though oil rigs are down by 58 percent. Production has been resilient despite spending cuts as drillers focus on the most prolific properties.
“The guns are loaded and ready to be fired again,” said Kilduff. “They’re waiting for a signal from OPEC or the rig count, or some kind of clear signal that the oversupply is going to be addressed.”