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5 Jan 2007

Oil Losses May Impact Hedge Funds

The recent drop in oil prices has raised market speculation that hedge funds might be taking large losses in oil position investments. A lot like the big natural gas bet that sank the multi-billion dollar Amaranth fund in 2006.

Oil prices stayed under $56 on Friday after an almost 9% drop over the past two days to its lowest close in 18 months. Investors are worried about growing U.S. fuel stocks and mild weather. The hefty losses in oil as well as in other commodities also may have been triggered by funds switching into other assets, it was reported in the Scotsman.

"Weather is certainly a key driver of sentiment, but what has been set in motion is a far more general demand pessimism for the year ahead," said Barclays Capital in the "This has produced a market that is more sensitive than usual to any producer hedging, and which is inclined to attempt to break sharply lower."

A top Iranian oil official said they were hoping to keep markets balanced until the 12-member group meets on March 15, but OPEC was keeping an eye on hedge fund activity in the markets, "We have to see whether the funds overreact... If that's the case, we may have to consider meeting (before March)," said Iran's OPEC Governor Hossein Kazempour Ardebili.

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