Investors continued to sell petroleum futures and options last week as sentiment became the most bearish since the middle of the year, before Saudi Arabia and its OPEC+ partners removed extra crude from the market.
Hedge funds and other money managers sold the equivalent of 57 million barrels in the six most important futures and options contracts over the seven days ending on Nov. 7.
Fund managers have been sellers in five of the most recent six weeks reducing their combined position by a total of 331 million barrels since Sept. 19.
The combined position was reduced to just 349 million barrels (13th percentile for all weeks since 2013) from a high of 680 million barrels (64th percentile) six weeks earlier.
It was only slightly above the recent low of 282 million barrels (5th percentile) at the end of June before Saudi Arabia and its OPEC⁺ partners deepened their production cuts from the start of July.
The progressively bullish sentiment which gripped the market in the third quarter has evaporated during October and November.
Continuing the pattern of previous weeks, fund sales last week were concentrated in crude (-52 million barrels), with roughly equal sales of NYMEX and ICE WTI (-28 million) and Brent (-24 million).
The position in WTI has become particularly bearish: the position in NYMEX and ICE WTI was reduced to just 90 million barrels (4th percentile) down from 286 million (60th percentile) at the end of September.
The reduction in WTI positions has coincided with the stabilisation of crude inventories around the NYMEX delivery point at Cushing in Oklahoma and easing of the extreme backwardation in nearby calendar spreads.
The sharp run up and collapse of calendar spreads is characteristic of an end to the squeeze on deliverable supplies. With the squeeze apparently over, fund managers had become much more bearish about WTI prices.
Bearish short positions in the premier NYMEX WTI contract were boosted to 96 million barrels on Nov. 7 from just 20 million at the start of October.
Bearish short positions were outnumbered by bullish long ones by a ratio of just 1.62:1 last week down from 6.15:1 at the start of October.
But the concentration of short positions has increased the probability of a sharp reversal in the previous downward price trend when funds to realise their profits.
It has also heightened the risk of further action by OPEC to drive prices higher and/or a renewed squeeze on deliverable inventories at Cushing.
Most traders already expect Saudi Arabia, Russia and their OPEC⁺ allies to extend current production cuts from the end of December until at least the end of March.
U.S. NATURAL GAS
Portfolio investors are struggling to become bullish about the outlook for U.S. gas prices in the face of record production and a mild start to the winter heating season.
Hedge funds and other money managers sold the equivalent of 380 billion cubic feet (bcf) over the seven days ending on November 7.
Since the start of July, funds have repeatedly tried to become more bullish only to be forced into a retreat by the persistence of high inventories.
Fund managers have never been net buyers (or net sellers) for more than two consecutive weeks since July 11 before reversing course.
As a result, the net position of 563 bcf (45th percentile) on November 7 was not significantly different from the position of 743 bcf (48th percentile) on July 11.
Front-month futures prices are very low in real terms, which implies the balance of risks is titled towards the upside.
But fund managers who have accumulated a bullish long position have been repeatedly wrongfooted by high production and mild weather that has left inventories above the seasonal average.
John Kemp is a Reuters market analyst. The views expressed are his own. Follow his commentary on X.
(Editing by David Evans)