NEW YORK (Bloomberg) -- Short-selling is rearing its head in the oil market again.

After bullish bets on Brent crude hit a record and futures surged to two-year highs, hedge funds are pulling back with a sense that the rally reached its limit for now. Wagers on lower prices rose by the most since June as Middle East tensions took a backseat, while uncertainty looms over Saudi Arabia’s push to extend OPEC’s output curbs this month.

"We’re at levels where the market appears to have crested," said Gene McGillian, a market research manager at Tradition Energy in Stamford, Connecticut. "Continuing to see supply draw-downs is probably what the next leg of the rally will be predicated on."

Doubts over Russia’s willingness to go along with the Saudis, record production from America’s prolific shale fields and a worse outlook for demand from the International Energy Agency helped snap oil’s longest streak of weekly gains in a year.

At the same time, concern over heightened geopolitical risks in the Middle East seems to have subsided, at least for now, said Rob Haworth, who helps oversee about $150 billion in assets at U.S. Bank Wealth Management in Seattle.

"We haven’t seen more conflict," he said. "For prices to get a lot higher, you have to see a meaningful increase in disruptions—and we haven’t."

Hedge funds lowered their Brent net-long position—the difference between bets on a price increase and wagers on a drop—by 1% to 537,557 contracts in the week ended Nov. 14, according to data from ICE Futures Europe.
Shorts surged 8.7%, while longs fell 0.1%.

Meanwhile, the net-bullish position on West Texas Intermediate, the U.S. benchmark, rose 10% to 349,712 contracts over the same period, according to the Commodity Futures Trading Commission. The net-long position on benchmark U.S. gasoline rose 11%, and diesel net-longs rose 3.3%.

But that optimism may be fading, too. WTI also fell from its recent highs, with American crude stockpiles rising by more than 4 MMbbl in two weeks.

Plus, there are real risks that OPEC may not be able to effectively extend cuts and will add to the overhang spurred by the U.S. shale surge, said Haworth.

"It’s hard for me to make a case that we’re creating a new higher trading range," he said. "We’re still staying cautious here."