February 4, 2020 / 1:01 AM / 17 days ago

RPT-COLUMN-Funds dump oil as fears about coronavirus hit to demand grow: Kemp

(Repeats Monday’s column with no changes to text)

* (The opinions expressed here are those of the author, a columnist for Reuters.)

* Chartbook: tmsnrt.rs/2RSu7LR

By John Kemp

LONDON, Feb 3 (Reuters) - Hedge funds were heavy sellers of crude oil and refined products last week as the worsening coronavirus outbreak stoked fears about a China-led slowdown in oil consumption in 2020.

Sunny optimism at the start of the year about an acceleration in the global economy has evaporated, replaced instead by extreme concern that the coronavirus and quarantine measures will hit oil consumption hard.

Travel restrictions within China, the reduction in passenger flights to and from the country, and the slump in freight movements will all severely dent oil demand, especially for middle distillates such as diesel and gasoil.

Hedge funds and other money managers sold petroleum futures and options in the six most important contracts equivalent to 147 million barrels in the week to Jan. 28, according to data from regulators and exchanges.

Fund sales were the largest in any one week since July 2018 and among the heaviest at any time in the last eight years, the period for which detailed data is available (tmsnrt.rs/2RSu7LR).

Portfolio managers last week sold NYMEX and ICE WTI (56 million barrels), Brent (27 million), U.S. gasoline (28 million), U.S. diesel (16 million) and European gasoil (20 million).

Fund selling in oil started shortly after Jan. 7, initially in small volumes, reflecting profit-taking after a large accumulation of bullish positions late last year, but has accelerated more recently.

Funds have sold a total of 236 million barrels of crude and products over the last three weeks, after buying 533 million barrels over the previous three months.

A new cycle of short-selling appears to have started in NYMEX WTI with fund managers adding 39 million barrels of additional short positions since Jan. 7.

Following the heavy sales, hedge fund positioning in crude and products appears close to neutral, with bullish long positions outnumbering bearish short ones by 4:1, slightly below the long-term average of 5:1.

The long-short ratio has fallen from almost 7:1 at the start of the year but remains well above the recent low of less than 3:1 in early October.

Since the turn of the year, long-short ratios have fallen from 9:1 to 4:1 in WTI; 13:1 to 8:1 in U.S. gasoline; and 13:1 to 3:1 in European gasoil.

In U.S. diesel, hedge funds have transformed a net long bullish position of 21 million barrels at the end of 2019 into a net short bearish position of 14 million barrels last week.

Oil traders are anticipating a massive hit to consumption in the short term, with governments and businesses in many provinces of China extending the lunar new year holiday to help contain the epidemic.

No one knows how long the coronavirus outbreak will last nor how far it will spread before burning itself out, but traders are now expecting a severe shock to consumption in the short term.

Related columns:

- Fund took a break from selling oil – until coronavirus concerns escalated (Reuters, Jan. 27)

- Priced for perfection, oil slides on fears coronavirus will hit demand (Reuters, Jan. 24)

- Hedge funds sell oil as doubts about economy resurface (Reuters, Jan. 20)

- Oil at the crossroads as hedge funds build large bullish position (Reuters, Jan. 8) (Editing by Kirsten Donovan)

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