INVESTORS became more bullish on crude oil in the latest week as visible inventories dwindled and Saudi Arabia and its allies in the Organisation of the Petroleum Exporting Countries extended their production cuts to the end of 2023.
But some of the former bullishness about diesel and other middle distillates evaporated on signs of a prolonged manufacturing downturn in Europe and China that could limit cyclically sensitive diesel consumption.
Hedge funds and other money managers purchased the equivalent of 41 million barrels in the six most important petroleum futures and options contracts over the seven days ending on Sept 12.
Fund managers have been net purchasers of petroleum in seven of the last 11 weeks, buying 372 million barrels since June 27.
In consequence, the combined position climbed to 655 million barrels (62nd percentile for all weeks since 2013) on Sept 12 up from 282 million barrels (5th percentile) on June 27.
Continuing the pattern in recent weeks, purchases focused on crude, with buying in both Nymex and Ice WTI (+27 million barrels) and Brent (+20 million).
There was also small buying in US petrol (+7 million barrels) but this was more than offset by sales of US diesel (minus two million) and European gas oil (minus 11 million). Fund managers have been net purchasers of crude in eight of the last 11 weeks, increasing their position by a total of 295 million barrels since end-June.
But they were net buyers of refined fuels in only six of the last 11 weeks, increasing their total position by just 78 million barrels.
Funds have actually been net sellers of products in each of the four weeks since mid-August as some of the former bullishness has disappeared. Sales have been concentrated in middle distillates, previously the most bullish element of the petroleum complex, rather than petrol.
The net position in all products had fallen to 155 million barrels (71st percentile) on Sept 12 down from 177 million (80th percentile) on Aug 15.
Saudi-led output cuts and the rapid depletion of crude inventories around the Nymex WTI delivery point at Cushing in Oklahoma are underpinning increased bullishness towards crude.
Short positions in Nymex WTI slumped to just 21 million barrels on Sept 12, the lowest for more than a year since June 2022.
The short squeeze on the Nymex WTI contract appears to be complete with remaining short positions back to historically low levels from a high of 136 million at the end of June 2023.
By contrast, manufacturing activity remains stuck in the doldrums and the escalation of oil prices and its potential impact on inflation and interest rates are starting to weigh on the outlook for distillates. Investors remain ambivalent about the outlook for US gas prices – torn between depleting inventories and the prospect of a warmer-than-average winter driven by a strong El Nino.
Hedge funds and other money managers purchased the equivalent of just 12 billion cu ft in the seven days ending on Sept 12.
The net position of 197 billion cu ft (37th percentile for all weeks since 2010) was down from the recent high of 743 billion cu ft (48th percentile) on July 11.
The net position across the two major US gas futures and options contracts was no higher than the 241 billion cu ft (38th percentile) reached as long ago on May 23.
Investors remained ambivalent even though working gas inventories had fallen to just 85 billion cu ft (+3% or +2.73 standard deviations) above the prior 10-year seasonal average.
The surplus was down from 299 billion cu ft (+12% or +0.81 standard deviations) at the end of June, which would have been expected to boost prices and positions.
But gas inventories in East Asia are high, storage space in Europe is almost full, and North America is likely to experience a warmer-than-normal winter if strong El Nino conditions continue to develop in the Pacific. The prospect of reduced consumption and slower export growth is weighing on gas prices and has kept them range bound for the last three months. — Reuters
John Kemp is a Reuters market analyst. The views expressed are the writer’s own