Oil report

RPT-COLUMN-Hedge fund selling slows ahead of Saudi warning: Kemp

(Repeats column sent on Sept. 21 with no changes to text. John Kemp is a Reuters market analyst. The views expressed are his own)

* Chartbook:

LONDON, Sept 21 (Reuters) - Hedge funds sold petroleum for the fourth week running, though the rate slowed from the two-year peak set a week earlier, as they lowered their expectations on oil consumption, prompting Saudi Arabia to issue an unusually blunt warning to short sellers.

Hedge funds and other money managers sold the equivalent of 18 million barrels in the six most important petroleum futures and options contracts in the week to Sept. 15, down from sales of 171 million the week before.

The combined position across all six contracts has fallen to 426 million barrels (which puts it in the 24th percentile for all weeks since 2013) from 664 million barrels on Aug. 18 (the 63rd percentile).

Petroleum positions have turned firmly bearish, from moderately bullish in the middle of last month, records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission show.

Portfolio managers have become sceptical about market rebalancing as OPEC+ shows signs of weariness with production cuts and oil consumption recovers more slowly from the pandemic than anticipated.

As a result, fund short positions have risen to the highest for more than two years, while the ratio of long to short positions has been sinking towards a multi-year low (

Negative sentiment prompted an impassioned response from Saudi Arabia’s oil minister on Thursday, who challenged short sellers to “make my day” and warned them they would be “ouching like hell”.

The minister’s intervention was clearly intended to discourage further short selling putting downward pressure on prices, and appears to have been successful in the short term.

Whether it can produce a sustained shift in sentiment is less clear. Rhetoric can be a signal of intentions. But it can also be a substitute for action. Fund managers may therefore test Saudi Arabia’s resolve.

If Saudi Arabia wants to deter short-selling, it will probably need a stronger global economic recovery, or to be willing to reduce its own production further relative to consumption and the output trajectory agreed in April.

Last week’s sales were concentrated in Brent (-40 million barrels), European gasoil (-12 million) and U.S. gasoline (-3 million), partly offset by buying in NYMEX and ICE WTI (+31 million) and U.S. diesel (+7 million).

Fund managers have turned increasingly negative towards middle distillates, such as gasoil, as the continued slump in aviation cuts jet fuel consumption and leaves surplus jet to be blended into the diesel supply.

In turn, slumping margins for middle distillates are causing refineries to slow their crude procurement and processing, threatening to push the oversupply back up the supply chain to the crude market.

Related columns:

- Oil recovery waits for international flying to return (Reuters, Sept. 18)

- Bloated diesel stocks weigh down global oil market (Reuters, Sept. 17)

- Hedge funds dump oil as outlook worsens (Reuters, Sept. 14)

- Oil market cycle slips into reverse (Reuters, Sept. 8) (Editing by Barbara Lewis)