Investors remain strongly bearish on petroleum prices, even as confidence grows that the U.S. Federal Reserve will cut interest rates to boost consumer and business spending. Last week, fund managers returned to selling oil futures and options, as the brief rally from the previous week quickly lost steam and negative sentiment took hold once again.
Hedge funds and other money managers offloaded 48 million barrels across the six major futures and options contracts in the week ending August 20. This marks the sixth time in seven weeks that funds have been sellers, reducing their positions by a staggering 346 million barrels since early July, based on data from exchanges and regulators.
The overall position has shrunk to just 178 million barrels, the fourth-lowest on record since weekly tracking began in 2013. This is a significant drop from a recent high of 524 million barrels on July 2, which was in the 40th percentile.
In the most recent week, managers sold off European gas oil (-20 million barrels), NYMEX and ICE WTI (-18 million), Brent (-9 million), and U.S. diesel (-4 million). The only exception was U.S. gasoline, where they bought an additional 3 million barrels. Across the board, positions became extremely bearish, particularly in middle distillates, which are highly sensitive to the business cycle. These positions were the most negative since the economic slowdown of 2015/16.
Even with rising confidence that the Federal Reserve and other major central banks will cut interest rates to stimulate the economy, concerns about weak oil demand persist. Traders are also worried about potential output increases from Saudi Arabia and its OPEC⁺ allies starting in October, which could add to inventories and push prices down further.
Despite this, there is still room for short-covering and the rebuilding of bullish positions if sentiment shifts. However, for now, any potential price increases are being held back by ongoing doubts about the economic outlook and fears of additional oil from OPEC⁺.
U.S. Natural Gas
In contrast, portfolio investors slightly increased their positions in U.S. natural gas. The combination of hotter-than-usual temperatures and ultra-low fuel prices for power generators has been steadily reducing excess gas inventories. Hedge funds and money managers purchased the equivalent of 163 billion cubic feet (bcf) of gas futures and options at Henry Hub in Louisiana, primarily through short-covering as they repurchased 164 bcf of previous short positions.
As a result, the net long position increased to 515 bcf, the highest in seven weeks, placing it in the 46th percentile for all weeks since 2010. Over the last six weeks, working gas inventories have grown by only 100 bcf, the smallest seasonal increase in at least a decade. While inventories were still 378 bcf above the 10-year seasonal average on August 16, this surplus has narrowed significantly from 538 bcf in early July, as power generators took advantage of cheap gas to meet strong air conditioning demand.
With the air conditioning season more than halfway over, it’s likely that inventories will remain above average when the winter heating season begins on November 1. However, the surplus is steadily eroding and could disappear entirely by the end of winter 2024/25.
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