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Column: Hedge funds pull bullish bets on petroleum

LONDON (Reuters) - Hedge funds turned less bullish on petroleum at the end of July amid anticipated rises in OPEC+ production and growing concerns about the impact of resurgent coronavirus infections on the global economic outlook.

Prices at a gas station offering the lowest price for a liter of gas in the city are displayed as the coronavirus disease (COVID-19) outbreak continues in Mexico City, Mexico, March 27, 2020. REUTERS/Henry Romero

Money managers sold the equivalent of 40 million barrels in the six most important petroleum futures and options contracts in the week ending July 28.

Selling was at the fastest rate for 19 weeks, since the middle of March, when the epidemic was still accelerating in many large economies and countries were on the eve of lockdown.


Portfolio managers sold both crude (-36 million barrels) and refined products (-5 million barrels) as economic prospects darkened and the international aviation industry was hit by new travel restrictions.

There were net sales of Brent (-21 million barrels), NYMEX and ICE WTI (-15 million), U.S. gasoline (-2 million) and European gasoil (-5 million), with small buying only in U.S. diesel (+3 million).

Until recently, hedge funds had been generally bullish on crude, buying 367 million barrels between the middle of March and the middle of July (compared with only 21 million barrels of products over the same period).

Saudi Arabia’s and Russia’s evident determination to eliminate excess stocks that built up following lockdowns and their price war, coupled with the sharp fall in U.S. output, had previously underpinned positive sentiment.

U.S. crude production declined by more than 2.7 million barrels per day between March and May, according to the U.S. Energy Information Administration, accelerating the rebalancing of production and consumption.

More recently, however, there have been signs of a rebound in U.S. output as some wells that were temporarily choked back or shuttered during the price crisis in April and May have restarted.

Saudi Arabia and Russia have also indicated they will raise their output this month in line with the agreements struck in April and June.

Production is starting to rise at the same time as there are growing doubts about the robustness of the global economic recovery.

The epidemic is still accelerating at a global level, with rapid transmission in Brazil and India, and renewed outbreaks in countries such as Australia and Spain that had previously appeared to suppress new cases.

The prospect of new lockdowns and an even slower recovery in international aviation is forcing some analysts to revise their oil consumption forecasts downward.

Until the middle of July, hedge funds were cautiously betting on a recovery in crude prices and refined product margins, but now even that limited confidence is faltering.

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

Related columns:

- Hedge fund buying switches from crude to fuels (Reuters, July 27)

- U.S. refiners trim crude processing as recovery falters (Reuters, July 23)

- Hedge funds stick to the sidelines on oil (Reuters, July 20)

- Hedge funds lack conviction on oil outlook (Reuters, June 29)

Editing by Jane Merriman