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Column: Hedge funds lack conviction on oil outlook

LONDON (Reuters) - Hedge funds increased their bullish positioning in oil last week, reversing a bearish move the week before, but the minimal changes serve to confirm the market’s lack of direction since the start of June.

A drilling rig is seen at Vaca Muerta shale oil and gas drilling, in the Patagonian province of Neuquen, Argentina January 21, 2019. REUTERS/Agustin Marcarian/File Photo

The equivalent of 26 million barrels were purchased by hedge funds and other money managers in the six most important futures and options contracts in the week to June 23, after selling 16 million barrels the previous week.

Portfolio managers hold a position of 626 million barrels, up from only 282 million when the volume war was raging in late March and major economies were entering lockdown. But that remains significantly down from 970 million barrels at the start of the year.

Last week saw net purchases of Brent (+16 million barrels), NYMEX and ICE WTI (+2 million), U.S. gasoline (+5 million) and European gasoil (+5 million) but small sales of U.S. diesel (-1 million).

Most of the increase was driven by the reduction of previous bearish short positions (-17 million barrels) rather than the creation of new bullish long ones (+9 million).

Short-covering pushed the ratio of long to short positions to 4.2 to 1, up from 3.8 to 1 the previous week, and the highest since late January.


Position changes are consistent with expectations for a continued economic recovery after the coronavirus lockdowns and production restraint by OPEC+ and U.S. shale oil producers.

They are also consistent with a gradual improvement in refining margins for gasoline and diesel from their current very depressed levels.

But the low absolute level of positions, small weekly changes and moderate long/short ratios suggest portfolio managers have low levels of conviction about all these trends.

The distribution of upside and downside risks is too wide and symmetrical at the moment for investors to build large positions.

John Kemp is a Reuters market analyst. The views expressed are his own.

Related columns:

- Oil refiners adapt to post-lockdown shift to gasoline from diesel (Reuters, June 26)

- Oil prices transitioning to next phase of cycle (Reuters, June 23)

- Funds realise profits, anticipate pullback after oil rally (Reuters, June 22)

- Oil prices no longer especially cheap after strong rally (Reuters, June 19)

Editing by David Goodman