LONDON, Dec 14 (Reuters) - Hedge fund managers purchased petroleum futures and options last week for the fifth week in a row, betting the rollout of coronavirus vaccines will boost international aviation and business activity from early next year.
But the rate of buying is slowing, perhaps because of the advent of the holiday season, but also because risks are shifting, with prices having already risen rapidly and so are increasingly vulnerable to a short-term correction.
Hedge funds and other money managers purchased the equivalent of 38 million barrels in the week ending Dec. 8, taking total buying over the five most recent weeks to 342 million barrels.
But purchases were the slowest since the announcement of successful vaccine trials sparked the current rally at the start of November, indicating that the impetus is fading.
Last week’s purchases were concentrated in Brent (+27 million) with only minor buying in NYMEX and ICE WTI (+3 million), U.S. gasoline (+6 million), U.S. diesel (+1 million) and European gas oil (+1 million).
The prospect of an early deployment of effective vaccines has squeezed many fund managers previously pessimistic about oil consumption and prices next year.
The number of bearish short positions across the six contracts has almost halved to 202 million barrels, from 387 million at the start of November.
Bullish long positions have increased, but only by a fifth to 900 million barrels, from 743 million barrels before the vaccines were announced.
Long positions now outnumber short ones by a ratio of almost 4.5:1, the most bullish since January, before the impact of the coronavirus epidemic was understood and it seemed contained in China.
The ratio is now in the 65th percentile for all weeks since the start of 2013, a startling turn around from the 14th percentile at the start of November.
There is still scope for the hedge fund community to add a substantial number of new long positions and increase its bullish positioning further.
But with Brent prices already up by nearly $12 per barrel (30%) since early November and the significant reduction of short positions, the balance of price risks is shifting.
If the balance was tilted to the upside at the start of November, it is now broadly neutral and moving towards the downside.
Traders may be over-optimistic about the speed of both vaccine deployment and the relaxation of coronavirus controls on business activity and flying.
At the same time, rising prices are already encouraging a small but significant increase in U.S. shale drilling and weakening the internal cohesion of the OPEC+ group of oil exporters.
Brent prices are now climbing into the critical area of $55 +/- $5 where Saudi Arabia and Russia disagreed earlier this year about the desirability of continuing to restrain production.
Portfolio managers have gambled heavily on an early and sustained increase in oil consumption coupled with continued producer restraint next year.
The central outlook is likely to prove correct, but the distribution of risks around it has clearly shifted significantly over the last five weeks as prices have risen, with more scope for disappointment than before.
John Kemp is a Reuters market analyst. The views expressed are his own.
Related columns: Oil sees more fund buying, but risks shifting (Reuters, Dec. 7) Positive oil outlook draws in fund managers (Reuters, Dec. 1) Oil sees wave of fund buying on early COVID immunisation hope (Reuters, Nov. 23) Successful vaccine would boost oil consumption, but not for 6-12 months (Reuters, Nov. 10) (Editing by Susan Fenton)
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