Portfolio investors’ oil positions are exhibiting significant week-to-week volatility as traders struggle to anticipate the net effect of an economic slowdown amid exceptionally low inventories of crude and diesel.
Hedge funds and other money managers purchased the equivalent of 33 million barrels in the six most important petroleum futures and options contracts in the week to Oct. 25.
The previous four weeks saw two large purchases (+62 million and +47 million barrels) and two large sales (-34 million and -50 million barrels) as investor sentiment see-sawed.
The mixed picture continued last recent week, with heavy buying of Brent (+29 million barrels), and smaller purchases of NYMEX and ICE WTI (+6 million) and U.S. gasoline (+6 million).
But that was partly offset by small sales of U.S. diesel (-4 million) and European gas oil (-2 million).
Fund managers still have an overall bullish bias on petroleum with long positions outnumbering shorts by a ratio of 5.17:1 (66th percentile for all weeks since 2013).
But uncertainty is high and confidence is low, with a net position of just 503 million barrels (33rd percentile for all weeks since 2013).
In Brent, the long-short ratio is in the 75th percentile (bullish) but the net position is only in the 41st percentile (relatively low confidence).
In middle distillates, the long-short ratio is in the 74th percentile, but the net position is more modest in the 58th percentile.
U.S. and global crude and distillates inventories are at their lowest seasonal levels for decades, which creates an upside bias for prices.
But the U.S. Federal Reserve is raising interest rates at the fastest clip for 40 years to squeeze inflation out of the economy.
And most other major central banks are following suit, resulting in a rapid tightening of financial conditions around the world.
The resulting cyclical slowdown is likely to dampen crude and distillate consumption and rebuild inventories to more comfortable levels.
The timing of any rebuild is uncertain, however, and inventories could remain tight or even deplete further in the short term.
In addition to purely economic factors, EU sanctions on maritime and insurance services for Russia’s crude and distillate exports scheduled to go into effect in December and February could tighten supplies even further.
With so many conflicting drivers, traders and investors are struggling to form a medium-term perspective on prices with any conviction, leaving the market directionless in the meantime.