Investors added to petroleum positions last week but at a much slower rate than before as short covering was completed and renewed concerns about the strength of petroleum consumption emerged.
Hedge funds and other money managers purchased the equivalent of 20 million barrels in the six most important futures and options contracts over the seven days ending on April 18.
But buying slowed from 36 million barrels in the week to April 11 and 128 million in the week to April 4, according to position records published by ICE Futures and the U.S. Commodity Futures Trading Commission.
The most recent week saw purchases of NYMEX and ICE WTI (+12 million), Brent (+8 million), U.S. gasoline (+2 million) and European gas oil (+1 million) but sales of U.S. diesel (-3 million).
Fund managers have become much more bullish towards crude following the surprise production cuts announced by Saudi Arabia and its allies in OPEC⁺ at the start of April.
But they remain more cautious on refined products owing to continued uncertainty about the outlook for the global economy and petroleum consumption.
Chartbook: Oil and gas positions
In crude, the ratio of bullish long positions to bearish short ones has climbed to 6.62:1 (82nd percentile for all weeks since 2013) up from just 2.11:1 (8th percentile) on March 21.
But in products, the long-short ratio has increased to only 2.69:1 (40th percentile) from 2.39:1 (38th percentile) on March 21.
And in middle distillates, such as gas oil and ultra-low sulphur diesel, the ratio has actually fallen slightly to 1.70:1 (33rd percentile) from 1.78:1 (35th percentile).
Distillates are the most cyclically-sensitive part of the petroleum market and are reflecting concerns about a slowdown in the industrial cycle as well as new refining capacity coming onstream in 2023/24.
Even on the crude side, however, the end of the short-covering process has sapped oil prices of some of their upward short-term momentum.
The number of short positions in Brent and WTI has been cut to just 79 million barrels from 204 million on March 21.
The number of shorts is the tenth-lowest out of 528 weeks since 2013, and it did not fall compared with the previous week, implying most if not all the short-covering had been completed.
U.S. NATURAL GAS
Investors are becoming cautiously more bullish on U.S. gas prices, anticipating prices have already dropped so low the balance of risks is tilted strongly towards the upside.
Fund managers purchased the equivalent of 142 billion cubic feet over the seven days ending on April 18, taking total buying over the most recent 11 weeks to 1,148 billion.
The position reached 87 billion cubic feet net long (34th percentile since 2010), the first net long position in 41 weeks since July 2022.
Funds have progressively turned their position around from a net short of 1,061 billion cubic feet (7th percentile) on January 31.
In real terms, the futures price of $2.23 on April 21 was still in only the 2nd percentile for all days since 1990, up from a near-record low of $2.01 on April 13 but far below $9.33 (90th percentile) on August 22.
Ultra-low prices are likely to encourage more gas-fired generation as well as a slowdown in new well drilling and completions.
Freeport LNG’s restart will boost exports and should accelerate the rebalancing process. Even so, funds appear very cautious about the speed of any turnaround and positioning remains well below the long-term average.
John Kemp is a Reuters market analyst. The views expressed are his own.