LONDON- Hedge funds have started to liquidate some of their record bullish positions in crude oil and refined fuels as the rally has gone into reverse and amid signs that U.S. shale production is surging.

Hedge funds and other money managers cut their combined net long position in the six most important futures and options contracts linked to petroleum by the equivalent of 41 million barrels in the week to Feb. 6.

The combined net long position has been cut by a total of 63 million barrels over the two most recent weeks after being raised by 258 million barrels over the previous five weeks.

Even after the recent reduction, however, the net long position across all six contracts is still a massive 1,112 million barrels higher than at the end of June 2017 (http://tmsnrt.rs/2BTkJRs).

The change has come from a reduction in long positions rather than an increase in short ones, which indicates that it has been driven by profit-taking after the rally.

Portfolio managers have cut bullish long positions in Brent, NYMEX and ICE WTI, U.S. gasoline, U.S. heating oil and European gasoil by a combined 71 million barrels since Jan. 23.

Bearish short positions have actually fallen by 8 million barrels over the same period, and are at the lowest level since oil prices started to slide in June 2014, according to records published by regulators and exchanges.

The liquidation of some of the record long positions hedge fund managers accumulated in the weeks and months before Jan. 23 has coincided with a softening in benchmark Brent prices since Jan. 25.

The accumulation of such an enormous number of long positions by fund managers had left the market looking very stretched, with long positions outnumbering short ones by a ratio of more than 11:1.

The recent downward correction in prices therefore came as no surprise since lopsided positioning has normally preceded a sharp reversal in the previous price trend since at least the start of 2015.

Commentators have identified several possible triggers for the correction in oil prices, including the sharp drop in U.S. equities, recent dollar strengthening and the unexpectedly rapid increase in U.S. shale production.

In reality, positioning in the oil market had become so stretched almost anything (or nothing at all) could have sparked a sell off.

Even after the recent liquidation, fund managers still hold a near-record net long position with longs far outnumbering shorts, underscoring the lingering downside risk.

(Editing by David Evans) ((john.kemp@tr.com; +44 207 542 9726 and on twitter @JKempEnergy))