Front-month Brent futures finished trading at $81 per barrel on April 25, after hitting a high of $87 on April 12, though still up from a recent low of just $73 on March 17.

After adjusting for inflation, prices are in the 41st percentile for all months since 2000, down from a high in the 47th percentile two weeks ago, but still up from the 33rd percentile in March.

In real terms, prices have fallen almost 30% from the same month a year ago, as fears eased that Russia's invasion of Ukraine and the sanctions imposed in response would disrupt global supplies.

Instead, real prices have come under pressure from concerns about slowing growth and increasing interest rates, with the decline consistent with a significant cyclical downturn.

As traders have become more confident about the continued availability of crude, Brent's six-month calendar spread has slipped to a backwardation of $2.40 per barrel (77th percentile for all trading days since 1990).

The spread is down from a backwardation of $3.99 (92nd percentile) on April 12, though still up modestly from $1.13 (59th percentile) on March 20.

Futures prices are signalling a market slightly weaker than normal, while spreads are signalling the opposite, most likely because current consumption is slack but expected to bounce back later in 2023.

But prices and spreads are within the middle portion of their historical range and have changed only a little since before the cuts were announced by the Organization of the Petroleum Exporting Countries and other large producers led by Russia, a group known as OPEC+.

Chartbook: Brent prices and spreads

That does not imply the cuts had no impact; without them, prices and spreads would likely have fallen further as traders focused on the weakening industrial cycle.

But in the overall picture the unexpected cuts totalling more than 1 million barrels per day have been readily absorbed and had only a modest impact on the actual price level.

Volatility briefly spiked following the announcement, but has since retreated near to its long-term average, showing most of the financial impact has been absorbed.

There has been more of a lasting impact in the physical market, given the significant withdrawal of barrels from the market in the near term.

The five-week dated Brent spread is still in a backwardation of $1.18 (86th percentile) up from a contango of 60 cents (20th percentile) on March 17.

ROUTING THE BEARS

If one of the objectives for Saudi Arabia and its OPEC+ allies was to drive bearish hedge funds out of the oil market, it seems to have succeeded.

Even before the cut was announced, the total number of hedge fund and other money manager short positions in Brent and WTI had fallen from a high of 204 million barrels on March 21 to 159 million by March 28.

Following the cut, however, the number of short positions was reduced further to just 78 million barrels by April 11, near to its post-2010 low of just 65 million.

The rout of bearish funds has driven the ratio of bullish long positions to bearish short ones in crude up to 6.62:1 (82nd percentile for all weeks since 2013) from 2.11:1 (8th percentile) on March 21.

In the past, Saudi Arabia's oil minister has described surprise production cuts intended to discourage hedge fund short selling as "ouching".

It is also in effect an "OPEC+ put" option that is intended to protect producers from sharp price falls, similar to the "Greenspan put" that characterised U.S. central bank monetary policy under former Federal Reserve Chair Alan Greenspan.

But the cut has, so far, drawn many new bulls into the market, with fund long positions up by a relatively modest 90 million barrels in the same four-week period.

For now, bullishness in the hedge fund community is restrained by concerns about the relatively poor macroeconomic outlook.

Related columns:

- Oil prices stall as short-covering rally is completed (April 17, 2023)

- Surprise, squeezing the shorts, and revealed preferences (April 3, 2023)

- Oil market has fully absorbed impact of Russia's invasion of Ukraine (March 9, 2023)

John Kemp is a Reuters market analyst. The views expressed are his own