(Repeats March 2 column with no changes. John Kemp is a Reuters market analyst. The views expressed are his own)
* Chartbook: tmsnrt.rs/2VCh7MU
By John Kemp
LONDON, March 2 (Reuters) - Hedge funds hit pause on their petroleum sales in late February, at least until concerns about a coronavirus-driven recession intensified towards the end of last week.
Hedge funds and other money managers purchased the equivalent of 11 million barrels in the six most important petroleum futures and options contracts over the week to Feb. 25, the most recent data available.
Over the previous six weeks, funds had been net sellers of 457 million barrels, but the rate of selling has been progressively slowing for three weeks, turning into net purchases in the most recent week.
Portfolio managers continued to sell former bullish long positions (-10 million barrels) but bought back some existing shorts (+20 million barrels) in a sign at least some thought the drop in prices was nearing its end.
Fund managers were buyers of NYMEX and ICE WTI (+30 million barrels) and Brent (+5 million) but continued to sell U.S. gasoline (-5 million), U.S. diesel (-10 million) and European diesel (-10 million).
Hedge funds’ ratio of long to short positions crept up to 2.75:1 from 2.61 the previous week, the lowest since the start of October, another sign investors saw the drop in prices nearing its end.
But most of the hedge fund purchases came before the vertiginous decline in oil prices towards the end of last week, as fears about an uncontained pandemic swept around financial markets.
The fact many managers had tried to identify an oil-price trough, incorrectly as it turned out, likely accelerated the sell off later in the week, as a fresh wave of selling hit the market (tmsnrt.rs/2VCh7MU).
The overhang of bullish hedge fund positions accumulated in the fourth quarter of 2019 has now been eliminated – to be replaced by one of the most bearish positions for the last three years.
From a purely positioning perspective, the balance of risks has shifted to the upside, with the prospect of further long liquidation or short sales diminishing and greater opportunity for fresh long building and short covering.
The shifting risk balance likely explains why fund managers slowed the pace of selling in recent weeks and identified a possible turning point, wrongly as it turned out.
From a fundamental perspective, however, the risk distribution appears more symmetrical, and much more uncertain, with the possibility the epidemic will interact with an already weakened global economy to produce a more prolonged slowdown or even a recession.
This latter concern prevailed in the second half of last week and drove oil prices sharply lower, as traders dumped higher-risk assets for safer government bonds.
Recession concerns were evident in the continued hedge fund selling of middle distillates such as diesel and gasoil, where portfolio managers are now running the most bearish position since the start of 2016.
- Oil traders price in coronavirus-driven recession (Reuters, Feb. 28)
- Oil funds’ first wave of virus-selling loses momentum (Reuters, Feb. 24)
- Coronavirus likely to have severe but short-lived economic impact (Reuters, Feb. 20)
- Oil prices bounce on hope for short coronavirus downturn (Reuters, Feb. 17) (Editing by David Evans)