(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON- Hedge funds ended 2020 with the most bullish position in oil for 11 months, anticipating coronavirus vaccines would allow consumption to return to normal by the end of 2021.

Along with other money managers, hedge funds had amassed a net long position of 741 million barrels in the six most important petroleum futures and options contracts by Dec. 29.

Positions were still down from 950 million barrels at the start of 2020, but had recovered from a low of just 280 million in March, when the first wave of the epidemic was raging and many economies were going into lockdown.

Bullish long positions outnumbered bearish short ones by a ratio of 5.30:1, the highest ratio since January 2020, and up from a low of 1.92:1 as recently as the start of November.

In the last six years, large concentrations of hedge fund long or short positions and extreme ratios have usually preceded a reversal in the price trend.

Measured in barrels and ratios, fund positions ended the year between the 73rd and 75th percentiles for all weeks since the start of 2013.

There is still scope for the fund community to add to its bullish positioning, but the balance of risks has started to shift, with an increased threat of long liquidation or new short selling causing a temporary decline in prices.

Positions appear most stretched in U.S. gasoline (73rd-75th percentile), NYMEX and ICE WTI (65-70th) and Brent (57th-74th), but less so in U.S. diesel (56th-58th) and European gasoil (59-68th).

Perhaps sensing the changing balance, portfolio managers have gradually reduced the rate of oil buying in recent weeks.

Funds have purchased a total of 385 million barrels over the most recent eight weeks, but the most recent week saw purchases of just 9 million barrels, the smallest addition so far.

The rate of buying has been progressively slowing for the last five weeks, according to position records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

Fund managers still expect vaccination programmes to restore oil consumption over the course of this year while OPEC+ continues to restrict production, leading to a persistent drawdown in oil inventories.

But the risks are concentrated on the downside, from a short-term resurgence of the virus, an unexpectedly slow deployment of vaccines, a lingering business cycle downturn, or a premature increase in OPEC+ output.

John Kemp

(Editing by Alexander Smith) ((john.kemp@thomsonreuters.com))