Kemp: Oil investors reduce positions to a record low amid financial meltdown.
Investors reduced their positions in petroleum to the lowest levels for at least 10 years early last week as part of a general retreat from risk amid growing concerns about a global slowdown.
Over the course of the week ending August 6, hedge funds and other money mangers sold 110 million barrels equivalent in six important contracts for petroleum futures and options.
In each of the last five weeks, fund managers were net sellers. Their combined position has decreased by 372 million barrels from the beginning of July.
By August 6, the combined position was down to 152 millions barrels. This is the lowest level since records began in 2013.
Brent was down 53 million barrels, NYMEX (-31 million), ICE WTI (-31 million), European Gas Oil (-13 millions), U.S. Diesel (-9million) and U.S. Gasoline (-5million).
The changes in positions were evenly split between liquidating former bullish longs (-60 millions) and initiating new bearish shorts (+50 millions).
Chartbook of Oil and Gas Positions
The biggest sell-off since January and Febraury 2020 when traders braced for the spread from China to other parts of the world of the coronavirus outbreak.
Fund managers had a record-low position in Brent and near-record-low positions in the rest.
The rapidity, size and breadth were consistent with a risk-off movement across asset markets. There was also concern about a possible slowdown of the major economies as well as a deterioration of the outlook for oil consumption.
Oil traders in recent weeks have been more focused on the threat of future consumption than the slow depletion global inventories.
The extremely bearish position in Brent and other contracts creates a potentially appealing entry point for new long bullish positions, provided that a slowdown can be avoided.
Brent futures for the front-month have risen above $80 a barrel after hitting a low on August 5 of $75 a barrel.
The recession-on trade on the oil market is now crowded, and susceptible to reversal.
The price rebound is consistent with the fact that fund managers are repurchasing short positions in order to realize profits, and possibly establishing new bullish long positions anticipating a rally to cover shorts and an fading recession threat.
U.S. NATURAL GASS
The portfolio managers did not change their neutral or broadly neutral position on U.S. Natural Gas as the inventories continue to slowly deplete despite the ultra-low prices that encourage maximum summer consumption of power generators.
Hedge funds, money managers and others sold futures and options based on the price of gasoline at Henry Hub (Louisiana) in the amount of 40 billion cubic foot (bcf), reversing a purchase of 30 bcf made the previous week.
The net position remained essentially unchanged, at 332 bcf net long. This is in the 41st per centile of all previous weeks. It can be described as neutral to moderately bearish.
The working gas inventory increased by only 71 bcf in the four weeks that ended on August 2, the lowest seasonal increase since 2010. Generators continued to gobble up cheap gas.
The record surplus from the winter of 2023/24 has been reduced by the unusually low accumulation of inventory this summer.
The inventories are 441 bcf above the seasonal average of the previous ten years (+16%, or +1.35 standards deviations), down from an excess of 664 bcf (+40%, or +1.47 standards deviations) at March 15.
It is almost certain that the inventory levels will be higher than average for the winter heating season 2024/25 when it begins on November 1.
The persistence of abundant stocks, after multiple failed attempts to build a bullish stance anticipating a standardisation of inventories over the past year, is forcing a more conservative approach for the moment.
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John Kemp is an analyst of the market. His views are his. Follow his commentary on X https://twitter.com/JKempEnergy (Editing by David Evans)
(source: Reuters)
