Oil market sees frenzy of hedge fund buying as traders turn bullish: Opinion

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.

The Ukraine-Russia crisis, 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.

Buyers bullish on long-term oil outlook

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.

There were purchases almost across the board in NYMEX and ICE WTI (+57 million barrels), Brent (+55 million), European gas oil (+18 million) and US gasoline (+10 million) but no change in US 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.

US natural gas market

In contrast to oil, portfolio investors remained bearish about US 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.

Looking ahead to the next winter

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 per cent or +1.47 standard deviations) above the prior ten-year seasonal average on March 15, up from a surplus of just 64 bcf (2 per cent or +0.24 standard deviations) on October 1.

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