Portfolio investors surged into crude oil futures and options in the latest week as prolonged output cuts by Saudi Arabia and its OPEC⁺ allies are expected to deplete inventories even further below average.
Hedge funds and other money managers purchased the equivalent of 98 million barrels of futures and options based on crude over the seven days ending on Sept. 5.
Purchases focused on NYMEX and ICE WTI (+72 million barrels) rather than Brent (+25 million), according to position records filed with regulators and exchanges.
As a result, the discrepancy where fund managers were more bearish towards U.S. crude in recent months was largely ended.
The total position in crude rose to 453 million barrels (45th percentile for all weeks since 2013) up from a record low of 205 million at the end of June.
Funds held 228 million barrels of Brent (48th percentile) and 225 million barrels of WTI (42nd percentile) up from 160 million in Brent (23rd percentile) but just 46 million in WTI (a record low) at the end of June.
The former bearishness towards WTI has largely been eliminated. Short positions in NYMEX WTI had been reduced to just 30 million barrels on Sept. 5 from 136 million barrels on June 27.
But with so many former bearish short positions already covered, the part of the rally driven by covering is largely completed. In the last 10 shorting cycles, shorts have fallen to an average of 24 million barrels.
Overall, investment managers have become mildly bullish towards crude with long positions outnumbering shorts by a ratio of 5.31:1 (63rd percentile) after a very bearish ratio of 1.86:1 (2nd percentile) at the end of June.
Chartbook: Oil and gas positions
The shift has coincided with production cuts announced by Saudi Arabia and Russia which removed a total of 75 million barrels of crude from the market in July and August.
Following their repeated extension, the cuts are set to remove a total of 245 million barrels by the end of December if implemented in full.
Saudi-led cuts have more than offset the impact on crude prices from a deteriorating outlook for the economy and oil consumption as well as continued growth in non-OPEC oil production.
U.S. commercial crude oil inventories had fallen to 4 million barrels (-1% or -0.07 standard deviations) below the prior 10-year seasonal average by the start of September, down from a surplus of 25 million barrels (6% or +0.43 standard deviations) in mid-July.
Crude inventories around the NYMEX WTI delivery point at Cushing in Oklahoma had fallen to 14 million barrels (-33% or -0.92 standard deviations) below the long-term average on Sept. 1.
The rapid depletion of stocks at Cushing explains why the NYMEX WTI contract has moved into a sharp backwardation and drawn such strong interest from hedge fund managers.
U.S. NATURAL GAS
Investors remain ambivalent about the outlook for U.S. gas prices, with bullishness from record summer power burn and falling inventories offset by bearishness from the prospect of a strong El Niño and a warm winter.
Hedge funds and other money managers purchased the equivalent of 254 billion cubic feet of futures and options linked to Henry Hub gas prices over the seven days ending on Sept. 5.
But that only partially reversed sales totalling 779 billion cubic feet over the two previous weeks and the overall position has become more bearish since the middle of July.
Funds hold a net long position of just 185 billion cubic feet (36th percentile for all weeks since 2010), down from 743 billion cubic feet (48th percentile) in mid-July.
Related columns:
- Hedge funds buy U.S. crude as stocks fall (September 4, 2023)
- Depleting U.S. crude inventories lift oil prices (August 31, 2023)
- Prospect of strong El Niño weighs on U.S. gas prices (August 30, 2023)
John Kemp is a Reuters market analyst. The views expressed are his own
