Investors have purchased oil at the fastest rate for more than four years, amid optimism that Saudi Arabia and its OPEC+ allies will continue to restrict production while an improving economic outlook boosts consumption.
Ukraine’s drone attacks on oil refineries and export
terminals in Russia, which threaten to disrupt production and exports of both
crude and fuels, have turbocharged the shift in sentiment to more bullishness.
Over the seven days ending on March 19, hedge funds and
other money managers purchased the equivalent of 140 million barrels in the six
most important futures and options contracts linked to petroleum prices.
The buying was the fastest since December 2019, and among
the ten fastest weeks since records began in 2013, according to position
reports filed with exchanges and regulators.
Chartbook: Oil and gas positions
There were purchases almost across the board in NYMEX and
ICE WTI (+57 million barrels), Brent (+55 million), European gas oil (+18
million) and U.S. gasoline (+10 million) but no change in U.S. diesel.
In a sign of how bullish investors were becoming, most
buying came from the creation of new long positions (+111 million barrels) with
only a moderate amount of short covering (-30 million).
The combined position across all six contracts had increased
to 641 million barrels (61st percentile for all weeks since 2013),
the highest for six months, and up from just 207 million (1st
percentile) in the middle of December.
Fund managers had become moderately bullish or at least
neutral towards the entire petroleum complex for the first time in months.
Inflation-adjusted crude oil prices were almost exactly in
line with the long-term average since the start of the century.
But many fund managers now expect production restraint and
strong consumption will lift them into the upper half of the historic range in
the next few months.
U.S. NATURAL GAS
In contrast to oil, portfolio investors remained bearish
about U.S. gas, even though gas prices are close to their lowest level in real
terms for more 30 years.
Fund managers purchased the equivalent of 113 billion cubic
feet (bcf) in the two major futures and options contracts linked to the price
of gas at Henry Hub in Louisiana.
Even so, the fund community still had a net short position
of 449 bcf (20th percentile for all weeks since 2010) on March 19.
Managers were more bearish about the outlook than a year
ago, when they held a net long position of 75 bcf (35th percentile).
Several major producers have already announced cuts to
drilling and production that should eventually eliminate the excess
inventories.
El Nino conditions in the Pacific are also fading, which
means winter 2024/25 is likely to be significantly colder than winter 2023/24.
In the meantime, however, the run of mild weather has
continued and the market is still struggling to bring inventories under
control.
Inventories had ballooned to 662 bcf (40% or +1.47 standard
deviations) above the prior ten-year seasonal average on March 15, up from a
surplus of just 64 bcf (2% or +0.24 standard deviations) on Oct. 1.
John Kemp is a Reuters market analyst. The views expressed are his own. Reuters
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