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Tue 8 Feb 2011 01:22 PM

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Oil investors should mull selling existing bullish positions, says JPMorgan

Without fresh political tension in Middle East, oil prices may decline this week, bank says in report

Oil investors should mull selling existing bullish positions, says JPMorgan
OIL TRADE Futures for March delivery on the New York Mercantile Exchange fluctuated today after falling for a third day yesterday to $87.48 (Getty Images)

Oil investors should consider selling existing bullish positions because prices may decline this week without fresh political tension in North Africa and the Middle East, according to JPMorgan Chase & Co.

New York crude futures surged to the highest since October 2008 on January 31, with London’s Brent trading above $100 a barrel, on concern Egyptian unrest would disrupt supplies from the Middle East and unsettle the region’s stability. Signs that protests are easing mean the market may be set for a “notable correction,” the bank said in a report on Monday.

Hedge funds raised bullish bets on oil by the most in eight weeks, according to the US Commodity Futures Trading Commission.

“This week will be characterised by a drift down in crude prices on days where either no new tensions arise or where political progress is perceived,” JPMorgan analysts led by New York-based Lawrence Eagles said in the report. “Investors should therefore consider taking profits on all or a portion of their remaining long positions.”

Prices slid five percent in the five days through February 7 as demonstrations against Egyptian president Hosni Mubarak subsided and the government met with opposition leaders. Futures for March delivery on the New York Mercantile Exchange fluctuated today after falling for a third day yesterday to $87.48.

Hedge funds and other large speculators boosted net-long positions on oil, or wagers on rising prices, by seventeen percent in the seven days ended Febuary 1, CFTC data show.

US president Barack Obama yesterday said Egypt is “making progress” in negotiations with the opposition. About 3.5 percent of global oil output moves through Egypt via the Suez Canal and the Suez-Mediterranean Pipeline, according to Bloomberg calculations using data from the Energy Department.

Crude may remain volatile because geopolitical risks in Algeria, Yemen and Jordan haven’t subsided, JPMorgan said. Opposition groups in Algeria, a member of the Organisation of Petroleum Exporting Countries, planned protests in Algiers on February 12.

“The risks of a more substantive price shock in the months ahead remain in place,” the JPMorgan analysts said. “We would look to add call option length.”

Goldman Sachs Group Inc on January 31 said Brent crude is “vulnerable” to a temporary price drop as anti-government violence won’t spread to the Middle East. Brent futures in London reached $100 a barrel that day for the first time since October 2008 and traded near $99 today.

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