Hedge Funds Turn Bearish on Oil: Kemp

By early last week, hedge funds had become the most bearish towards petroleum prices since the start of the year, as traders grew increasingly pessimistic about the global economy.

Hedge funds and other money managers sold the equivalent of 95 million barrels in the six most important futures and options contracts tied to petroleum prices in the week to Oct. 8.

Sales over the last three weeks have totalled 206 million barrels, according to an analysis of position records published by the U.S. Commodity Futures Trading Commission and ICE Futures Europe.

Fund managers now hold a net long position across the six main contracts of just 437 million barrels, down from a recent high of 911 million barrels in April, and the lowest since January.

If structural long positions are excluded, money managers are running a dynamic position of 53 million barrels net short, which is also the most bearish since January.

Funds have become increasingly bearish towards all elements of the petroleum complex in recent weeks, but especially crude and mid-distillates such as diesel and gasoil.

In the week to Oct. 8, fund managers sold Brent (47 million barrels), NYMEX and ICE West Texas Intermediate (34 million), U.S. diesel (7 million), European gasoil (5 million) and U.S. gasoline (2 million barrels).

Funds have sold 106 million barrels of WTI in the last three weeks and 88 million barrels of Brent in the last four weeks.

There are clear indications money managers embarked on a new cycle of short selling in NYMEX WTI around the middle of last month, with short positions increasing by 62 million barrels since Sept. 17.

Crude and mid-distillates are the contracts with the greatest exposure to the economic cycle and especially the performance of manufacturing, mining, oil and gas, and freight transportation.

Hedge fund sales are consistent with evidence from business surveys and other economic data suggesting global manufacturing and freight activity has started to shrink in recent months.

As a result, the major statistical agencies in the oil market have downgraded their forecasts for consumption growth in 2019/20 recently.

The most recent data came before the latest trade negotiations between the United States and China, which U.S. sources have called a "phase one deal" but China has described as a new round of consultations.

Reported progress in the talks has improved sentiment across all financial markets, including oil, but it remains unclear whether a significant deal will be reached soon or whether it can stem the earlier loss of economic momentum.

By John Kemp