Petroleum futures and options were hit by heavy profit-taking last week as speculation about a potential release of strategic oil reserves and intensifying concerns about the state of the global economy hit sentiment.
Hedge funds and other money managers sold the equivalent of 57 million barrels in the six most important petroleum-related futures and options contracts in the week to Nov. 16.
Last week’s sales were the highest for more than three months, according to position records from ICE Futures Europe and the U.S. Commodity Futures Trading Commission.
The heaviest selling was concentrated in NYMEX and ICE WTI (-34 million barrels) and Brent (-18 million), consistent with the possibility of a strategic stocks release led by the United States.
Among the other contracts, sales of U.S. diesel (-2 million barrels) and European gas oil (-12 million) were largely offset by purchases of U.S. gasoline (+9 million).
Across the six major contracts, portfolio managers have been sellers in five out of the last six weeks, reducing their positions by an aggregate 134 million barrels since Oct. 5.
The combined position has fallen to 736 million barrels (66th percentile for all weeks since 2013) down from 871 million barrels (79th percentile) at the start of October.
The adjustment has come mostly from the liquidation of previous bullish long positions (-115 million barrels) rather than the creation of new bearish shorts (+19 million), consistent with profit-taking after a big rally.
As a result, the combined position has become less lopsided, with longs outnumbering shorts by a ratio of 5.3:1 (71st percentile) down from 7.0:1 (87th percentile) in mid-October.
The transformation has been especially noticeable in Brent crude, where fund managers have cut their position by 111 million barrels in the last six weeks.
Brent positions have fallen from 333 million barrels (68th percentile) to just 222 million barrels (41st percentile) while the long-short ratio has tumbled from 6.3:1 (68th percentile) to just 3.4:1 (31st percentile).
By the start of October, speculation in the oil market had become overheated, with most investors anticipating further big gains in prices, even as prices were touching their highest level for three years.
Since then, concerns about the sustainability of the global economic expansion and the resurgence of coronavirus cases in Europe and North America have taken some of the heat out of oil prices.
The futures market is moving into the seasonally weaker half of the year, with talk about a coordinated release of strategic stocks adding to downward risks, prompting fund managers to realise some profits from the earlier rally.
John Kemp is a Reuters market analyst. The views expressed are his own.