LONDON (Businesshala) – Rising oil prices continue to attract fresh buying interest from hedge funds while accumulating pressure on bearish portfolio managers, but trading is getting crowded and there is a risk of a sudden reversal.
Hedge funds and other money managers bought the equivalent of 24 million barrels in the six most important petroleum-related futures and options contracts in the week. October 5, regulatory records show.
A total of 194 million barrels have been purchased in the past six weeks, reversing more than two-thirds of the 268 million barrels sold in the past 10 weeks, when the market was gripped by fears of rising coronavirus cases.
The most recent week saw broad-based buying of NYMEX and ICE WTI (+9 million barrels), US gasoline (+9 million), Brent (+4 million) and US diesel (+3 million), with modest selling. European gas oil (-1 million).
The number of short positions across all six contracts fell to just 151 million barrels, the lowest for 124 weeks, as continued price increases forced fund managers to close their positions.
Portfolio managers now have a strongly bullish position in the six contracts, with an increase from 677 million barrels (59th percentile) on August 24 to 871 million barrels (78th percentile for all weeks since 2013).
The position has become relatively stretched, with bearish shorts increasing the number of bullish longs from a ratio of 4.25:1 (57th percentile) to 6.76:1 (84th percentile) six weeks ago (tmsnrt.rs/2YAqhNT)
Fund managers are particularly enthusiastic about the middle distillate, which is most prepared for the economic cycle and will also benefit from any gas-to-oil switching this winter as a result of rising global gas prices.
Combined net long positions in US diesel and European gas oil rose to 152 million barrels (87th percentile), with long shorts exceeding 12:1 (98th percentile).
Fund managers expect the global manufacturing and freight business to continue to grow strongly, supported by oil and distillate demand, with additional boost from winter heating demand and higher gas prices.
But the increasingly one-sided situation continues to be a source of fragility and increases the chances of a sharp sell-off and a pullback if economic growth or fuel switching disappoints expectations.
When fund managers try to realize some of their paper profits, very long long-term ratios are preceded by a sharp reversal in price trend. And hedge funds’ current lack of short positions means there may be few speculative buyers to absorb such sales, increasing the risk of a sharp drop in prices.
– How high are oil prices really? (Businesshala, October 5)
– Hedge funds flock to oil as energy crunch (Businesshala, October 4)
– The lingering effects of Hurricane Ida tighten the global oil market (Businesshala, 30 September)
– Oil prices climb with little help from hedge funds (Businesshala, Sept 27)