Portfolio investors have become exceptionally bearish about crude oil as global economic growth slows and production cuts from Saudi Arabia and its OPEC⁺ allies have failed to lift prices.
Hedge funds and other money managers sold the equivalent of 64 million barrels in the six most important petroleum-related futures and options contracts in the seven days ending June 27.
Essentially all the sales were concentrated in crude contracts split evenly between Brent (-31 million barrels) and NYMEX and ICE WTI (-33 million barrels).
The net position across the three major crude contracts fell to 205 million barrels, the lowest since at least 2013, when data became available in this form.
Bullish long positions exceeded bearish short ones by a ratio of just 1.86:1 (2nd percentile for all weeks since 2013).
The last time fund managers were so pessimistic about crude prices was during the first wave of the coronavirus pandemic in 2020 and before that during the volume war between oil producers in 2014/2015.
Chartbook: Oil and gas positions
Pessimism was especially strong towards NYMEX and ICE WTI where the combined position had been cut to just 46 million barrels (the second-lowest in the last ten years).
Fund managers had accumulated 136 million barrels of gross short positions in NYMEX WTI, the most since 2017.
The slump in WTI positions is likely being intensified by contract changes which have seen WTI crude grades added to the Brent futures contract.
But more generally pessimism has been driven by fears about slowing consumption in North America, Europe and China, coinciding with continued output gains from the U.S. shale sector and sanctioned producers in Russia, Iran and Venezuela.
Global petroleum inventories have been trending higher for a year and are close to the prior 10-year seasonal average, sapping the former bullishness among investors.
Spot prices are close to the average since the turn of the century (after adjusting for inflation) as are nearby calendar spreads.
From a positioning perspective, extreme pessimism towards crude prices and lopsided positions are creating potential for an explosive rally in future.
If and when sentiment turns, the race to cover existing short positions and build new long positions is likely to accelerate and amplify an upturn in prices.
But that depends on expectations that crude production is falling or the economy and consumption are accelerating.
Traders do not seem sure of either at this point in time.
U.S. NATURAL GAS
Investors reduced their exposure to U.S. natural gas as prices climbed to their highest level for more than three months.
Hedge funds and other money managers cut long positions by -131 billion cubic feet and short positions by -137 billion cubic feet leaving the net position essentially unchanged.
Working gas inventories in underground storage were 290 billion cubic feet (+12% or +0.76 standard deviations) above the prior 10-year seasonal average on June 23.
The market has been moving progressively into surplus for nine months and there are no signs of a significant depletion yet.
With prices stuck close to their lowest levels for 30 years in real terms, some funds have been expecting at least a limited rebound.
But more significant position building will have to wait until there are firmer expectations that the inventory surplus will start to erode.
Related columns:
- Is oil market’s glass half-full or half-empty? (June 29, 2023)
- Oil bulls sidelined by economic uncertainty (June 26, 2023)
- Frustrated oil bulls made to wait for price recovery (June 22, 2023)
- Funds rotate positions from crude oil to distillates (June 19, 2023)
John Kemp is a Reuters market analyst. The views expressed are his own
