Portfolio investors have dumped petroleum futures and options, reversing the buying frenzy inspired by the production cuts announced by Saudi Arabia and its OPEC⁺ allies at the start of April.
Hedge funds and other money managers sold the equivalent of 145 million barrels in the six most important futures and options contracts over the seven days ending on May 2.
Fund managers have sold a total of 232 million barrels in the two most recent weeks, the fastest pace of selling since the U.S. banking crisis erupted in March and before that the imminent arrival of the pandemic in February 2020.
As a result, the combined position had been reduced to just 302 million barrels (7th percentile for all weeks since 2013) on May 2 from 534 million barrels (38th percentile) on April 18.
Bullish long positions outnumbered bearish shorts ones by a ratio of just 2.22:1 (17th percentile) down from 5.00:1 (64th percentile) as sentiment turned negative.
The position has essentially returned to where it was on March 21 (289 million barrels, 2.16:1) before OPEC⁺ surprised investors by announcing production cuts on April 2 totalling more than 1 million barrels per day.
Benchmark Brent prices have also returned to where they were on March 21 at around $75 per barrel after climbing to more than $87 in the middle of April.
Chartbook: Oil and gas positions
The most recent week saw sales across the board in Brent (-69 million barrels), NYMEX and ICE WTI (-37 million), European gas oil (-24 million), U.S. diesel (-11 million) and U.S. gasoline (-4 million).
In NYMEX WTI, a new wave of short selling appears to have started with gross short positions more than doubling to 47 million barrels on May 2 from 22 million on April 18.
Much of this new wave of bearishness stemmed from concerns about the deteriorating outlook for the global economy and petroleum consumption in the rest of 2023.
Fund managers had become especially bearish on middle distillates such as diesel and gas oil, the most exposed to the business cycle.
Funds held an overall net short position of 27 million barrels (6th percentile) in middle distillates and the long-short ratio had fallen to just 0.69:1 (5th percentile).
The position had become the most bearish for more than three years since the first wave of the pandemic erupted in the United States in March 2020.
U.S. NATURAL GAS
Investors’ earlier bullishness on U.S. gas also ebbed as temperatures remained mild and inventories stayed high despite the re-starting of Freeport LNG’s export terminal.
Funds sold the equivalent of 71 billion cubic feet over the seven days ending on May 2, after selling 99 billion cubic feet the week before.
The position slipped to 83 billion cubic feet net short (29th percentile for all weeks since 2010) down from 87 billion net long (35th percentile) two weeks earlier.
The ratio of bullish long positions to bearish short ones fell to 0.97:1 (29th percentile) from 1.03:1 (35th percentile).
Working gas inventories are still +261 billion cubic feet (+14% or +0.57 standard deviations) above the prior ten-year seasonal average up from a deficit of -263 billion cubic feet (-8% or -0.98 standard deviations) at the start of 2023.
Related columns:
- Oil prices drift down on renewed economy concerns (May 2, 2023)
- Oil buying slows amid renewed concerns about economy (April 24, 2023)
John Kemp is a Reuters market analyst. The views expressed are his own
