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Investors cut their petroleum positions to the lowest level for at least a decade early last week, part of a broad-based retreat from risk amid rising concerns over a global economic slowdown.
Hedge funds and other money managers sold the equivalent of 110 million barrels in the six most important petroleum futures and options contracts over the seven days ending on Aug. 6.
Fund managers had been net sellers in each of the five most recent weeks, reducing their combined position by a total of 372 million barrels since the start of July.
By Aug. 6, the combined position had been slashed to 152 million barrels, the lowest in records dating back to 2013.
The most recent week saw sales across the board in Brent (-53 million barrels), NYMEX and ICE WTI -31 million), European gas oil (-13 million), U.S. diesel (-9 million) and U.S. gasoline (-5 million).
Position changes were fairly evenly divided between the liquidation of former bullish long positions (-60 million) and initiation of fresh bearish shorts (+50 million).
The sell-off was the fastest since January and February 2020, when traders were bracing for the spread of the coronavirus epidemic from China to the rest of the world.
As a result, fund managers held a record low position in Brent, and near-record low positions in the rest of the petroleum complex.
The speed, scale and breadth of selling was consistent with a broad risk-off move across asset markets as well as concerns about a slowdown in the major economies and deterioration in the outlook for oil consumption.
In recent weeks, oil traders have focused more on the future consumption threat rather than the slow depletion of global inventories.
But the extremely bearish positioning in Brent and other contracts has created a potentially attractive entry point for new bullish long positions – provided a slowdown is averted.
Front-month Brent futures prices have bounced back above $80 per barrel from a low of just $75 per barrel at one point on Aug. 5.
With positions now extremely bearish, the recession-on trade in the oil market has become crowded and vulnerable to reversal.
The price bounce is consistent with fund managers repurchasing some short positions to take profits and perhaps establishing some fresh bullish long positions to anticipate the short-covering rally and a fading recession risk.
U.S. natural gas
Portfolio managers made few changes to their broadly neutral position in U.S. natural gas as inventories continued to deplete slowly despite ultra-low prices encouraging maximum summer consumption by power generators.
Hedge funds and other money managers sold the equivalent of 40 billion cubic feet (bcf) of futures and options linked to the price of gas at Henry Hub in Louisiana, reversing purchases of 30 bcf the week before.
The net position was basically unchanged at a net long of 332 bcf, in the 41st percentile for all weeks since 2010, best characterised as neutral verging on moderately bearish.
Working gas inventories accumulated by just 71 bcf over the four weeks ending on Aug. 2, the smallest seasonal increase in data going back to 2010, as generators continued to binge on cheap gas.
The unusually small accumulation of inventories this summer has helped narrow the record surplus inherited from winter 2023/24.
Inventories are 441 bcf (+16% or +1.35 standard deviations) above the prior ten-year seasonal average, down from a surplus of 664 bcf (+40% or +1.47 standard deviations) on March 15.
Even so, with the airconditioning season more than half over, it is virtually certain inventories will still be above average when the 2024/25 winter heating season starts on Nov. 1.
After multiple frustrated attempts over the last year to build a bullish position anticipating a normalization of inventories, the persistence of plentiful stocks is enforcing a more cautious approach for the time being. |
