Portfolio investors surged back into petroleum as Saudi Arabia’s unilateral production cut removed much of the previous downside risk to oil prices from slowing economies in China and Europe.
Hedge funds and other money managers purchased the equivalent of 115 million barrels in the six most important petroleum futures and options contracts over the seven days ending on July 11.
The increase was among the largest recorded over the last ten years (the 14th largest out of 539 weeks since 2013) and points to a significant adjustment in traders' assessments about the balance of risks.
In the most recent week, funds were major buyers of Brent (+48 million barrels), NYMEX and ICE WTI (+33 million), European gas oil (+17 million), U.S. gasoline (+12 million) and U.S. diesel (+5 million).
Across all six contracts, funds purchased a total of 163 million barrels in the two most recent weeks after Saudi Arabia extended its cut of 1 million barrels per day (b/d) for an extra month.
The total position increased to 445 million barrels (24th percentile for all weeks since 2013) on July 11 up from 282 million barrels (5th percentile) on June 27.
The ratio of bullish long positions to bearish short ones increased to 2.98:1 (30th percentile) from 1.95:1 (10th percentile).
Chartbook: Oil and gas positions
The increase in positions was led by crude (134 million barrels out of a total of 163 million) rather than products (29 million).
It was also disproportionately driven by repurchases of former bearish short positions (73 million) rather than the creation of new bullish long positions (89 million).
Crude-focused short-covering is consistent with Saudi Arabia’s extended cut reducing downside price risk stemming from slowing growth in China and Europe.
Fund managers were not yet bullish about the outlook for oil prices but the cuts blunted some of the extreme pessimism that weighed on the market at the end of June.
U.S. NATURAL GAS
Hedge funds and other money managers purchased the equivalent of 137 billion cubic feet of futures and options tied to U.S. natural gas prices over the seven days ending on July 11.
Funds had been buyers in each of the five most recent weeks, purchasing a total of 822 billion cubic feet since June 6.
They have accumulated a net long position of 743 billion cubic feet (47th percentile for all weeks since 2010) up from a net short position of 79 billion (29th percentile) on June 6 and 1,061 billion (7th percentile) on Jan. 31.
Fund managers appear to be anticipating a future tightening of the U.S. domestic market that has not happened yet.
Working gas inventories in underground storage were still +282 billion cubic feet (+11% or +0.78 standard deviations) above the prior ten-year seasonal average on July 7.
The surplus was little changed from +279 billion cubic feet (+12% or +0.69 standard deviations) on June 6 and was actually up from +44 billion cubic feet (+2% or +0.14 standard deviations) at the end of January.
But with real gas prices in the bottom decile for all days since 1990 and the number of active rigs drilling for oil and gas falling steadily, most traders now anticipate the market will tighten over the winter of 2023/24.
Related columns:
- Saudi output cut removes downside risk from oil market (July 12, 2023)
- Oil investors less bearish after Saudi output cut extended (July 10, 2023)
- U.S. oil and gas production set to turn down later in 2023 (July 5, 2023)
- Is oil market’s glass half-full or half-empty? (June 29, 2023)
John Kemp is a Reuters market analyst. The views expressed are his own
