Kemp: Oil bears become cautious as financial markets ease.
Investors reduced their short positions on petroleum after the other financial markets stabilized following an abrupt plunge earlier in this month. Crude prices also found support above $75 a barrel.
Over the course of the week ending August 13, hedge funds and other money mangers purchased the equivalent amount of 74,000,000 barrels on the six most important contracts for petroleum futures and option contracts.
The majority of purchases were made to buy back existing bearish short positions (+19 million barrels), rather than create new bullish long positions (-55 millions).
Fund managers purchased U.S. gasoline (up to 6 million barrels), U.S. Diesel (+4 million), and European Gas Oil (+2 million) from the U.S.
Chart of oil and gas positions
Investors had cut their positions to the lowest in over a decade a week earlier.
Brent crude futures also rose from a low of $75 per barrel on August 5, which was the lowest in eight months.
Prices and positions were so low that bearish trades became crowded, and the likelihood of a short-term rebound was high.
Upon stabilisation of other markets, some fund managers closed out their bearish positions and realized profits. Short-covering was both the cause and consequence of the price increase.
Even after short-covering however, the combined positions was only 226 million barrels. This is in the 3rd per centile for all the weeks since 2013.
Brent front-month prices increased to about $81 per barrel but this was not more than the inflation-adjusted long-term average.
The price could still be driven higher by short covering and re-building bullish positions.
For the moment, however, the prospect of a rise in prices and further positioning has been dampened by the lingering uncertainty about the future of the world's major economies.
U.S. NATURAL GASS
Investors have remained largely neutral in their position on U.S. Natural Gas for the third consecutive week, ending August 13.
Hedge funds, other money managers and hedge funds purchased futures and options based on the price of gasoline at Henry Hub in Louisiana that equated to 20 billion cubic foot (bcf).
Funds had a net-long position of 352 BCF (42nd percentile since 2010), essentially unchanged three weeks ago (341 BCF (41st centile) and down from the recent high of 1,123 BCF (59th centile) on Friday, June 11.
There are signs that the huge gas surplus inherited from the extremely mild winters of 2023/24 will be eroded as production grows slower and summer air conditioning demand and ultra low gas prices increase gas-fired generators.
The U.S. Energy Information Administration reported that working inventories fell 6 bcf in the week ending August 9, according to its data.
The inventory increase over the past five weeks was only 65 bcf, which is the slowest seasonal rise since 2010. This compares to a 10 year average of 213bcf.
In mid-March, the surplus was 664 (+40%, or +1.24 standard deviations).
It is almost certain that inventories will be higher than average by the time the winter heating season of 2024/25 begins on November 1.
The surplus will be completely eliminated by the end of the winter 2024/25.
Related columns include: - U.S. Power Producers binge on ultra cheap gas (July 30 2024); - U.S. Gas Surplus will be eliminated by the end of winter 2024/25;
John Kemp is an analyst of the market. His views are his. Follow his commentary on X https://twitter.com/JKempEnergy (Editing by Kirsten Donovan)
(source: Reuters)
