Portfolio investors are very bearish about the outlook for oil in the short term even though prices are already below their long-term average in real terms.
Hedge funds and other money managers sold the equivalent of 17 million barrels in the six most important futures and options contracts over the seven days ending on May 9.
Funds had sold a total of 249 million barrels in the three weeks since April 18, halving their previous holding, according to records published by ICE Futures and the U.S. Commodity Futures Trading Commission.
The combined position was cut to just 285 million barrels (6th percentile for all weeks since 2013) down from 534 million barrels (38th percentile) on April 18.
The ratio of bullish long to bearish short positions was cut to 2.03:1 (12th percentile) from 5.00:1 (64th percentile) over the same period.
Chartbook: Oil and gas positions
The most recent week saw sales of Brent (-25 million barrels) and U.S. gasoline (-9 million) partly offset by purchases of NYMEX and ICE WTI (+11 million), European gas oil (+3 million) and U.S. diesel (+2 million).
Bullishness sparked by unexpected output cuts announced by Saudi Arabia and its OPEC⁺ allies at the start of April has given way to pessimism about oil consumption stemming from a deteriorating economic outlook.
Portfolio investors are more bearish towards petroleum, especially Brent, than before OPEC⁺ surprised the market on April 2.
U.S. crude prices have fallen to $70 per barrel (43rd percentile for all days since 2000) from more than $83 (56th percentile) on April 12 and a high of $131 (90th percentile) in March 2022, after adjusting for inflation.
U.S. NATURAL GAS
Investors remained cautious about the outlook for U.S. gas with ultra-low prices failing to erode the surplus inventories accumulated last winter.
Funds sold the equivalent of 37 billion cubic feet over the seven days to May 9, taking total sales over the most recent three weeks to 206 billion cubic feet.
The combined position slipped to 120 billion cubic feet net short (28th percentile for all weeks since 2010) down from 87 billion cubic feet net long (35th percentile) on April 18.
U.S. gas inventories were still +257 billion cubic feet (+14% or +0.58 standard deviations) above the prior ten-year seasonal average on May 5.
The surplus was basically unchanged from +256 billion cubic feet (+15% or +0.60 standard deviations) eight weeks earlier on March 5.
Inflation-adjusted prices have remained in the 5th percentile since 1990, or below, since early March, creating the strongest possible incentive to reduce drilling rates and increase consumption.
The signal may be starting to work, with the number of rigs drilling for gas down by 16 over the seven days ending on May 12, the fastest weekly decline since 2016.
Related columns:
- Investors dumped oil, curtailing OPEC⁺ driven rally (May 9, 2023)
- 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
