March 25, 2019 / 12:55 PM / in 25 days

Column: Hedge funds increase appetite for oil

LONDON (Reuters) - Hedge funds bought another 65 million barrels of petroleum futures and options in the week to March 19, taking total purchases over the last 10 weeks to 384 million barrels, according to reports published on Friday.

A worker prepares to label barrels of lubricant oil at the state oil company Pertamina's lubricant production facility in Cilacap, Central Java, Indonesia November 6, 2017 in this photo taken by Antara Foto. Antara Foto/Rosa Panggabean via REUTERS

The one-week increase in net long positions was the largest since the end of August 2018, a strong bullish signal about the expected direction of prices over the next six months.

Hedge funds and other money managers have boosted their overall bullish position in the six most important derivative contracts linked to crude and fuels prices to 685 million barrels, up from just 302 million on Jan. 8.

Funds were substantial net buyers in the most recent week of NYMEX and ICE WTI (+50 million barrels) as well as Brent (+16 million barrels) and U.S. gasoline (+12 million barrels).

But they were net sellers of U.S. heating oil (-4 million barrels) and European gasoil (-9 million barrels), according to exchange and regulatory data (tmsnrt.rs/2UT8fPK).

Funds now hold almost five bullish long positions for every short bearish one in petroleum, up from a ratio of less than 2:1 at the start of the year, but still far below the recent peak of 12:1 at the end of September.

Until recently, most of the buying was concentrated in Brent and European gasoil, but buying rotated into WTI and U.S. gasoline in the most recent week.

Funds have reduced most, though not all, of the short positions that they started to accumulate from the end of August, indicating that the most recent short-selling cycle is nearing its end.

Portfolio managers have now reduced the number of short positions across the petroleum complex to just 173 million barrels, less than half a recent peak of 357 million on Jan. 8.

In NYMEX WTI, the number of short positions has fallen to just 51 million barrels, down from 133 million on Jan. 8.

Fund managers have become much less bearish about the outlook for oil prices since the start of the year as U.S.-China trade tensions have de-escalated.

Saudi Arabia has cut oil production aggressively and U.S. sanctions have disrupted exports from Venezuela and Iran, which has reduced fears about over-supply.

With so many short positions now squared up, however, short-covering will provide less support to petroleum prices going forward.

There is still plenty of scope to increase long positions, with current longs of 858 million barrels only just over half the recent peak of 1.6 billion barrels early last year.

Positions in U.S. heating oil and European gasoil remain very modest compared with last year, despite the potential consumption boost for both contracts from new shipping regulations at the end of the year.

But many managers may hesitate to add significantly to long positions until the risk of a global recession and slowdown in oil consumption growth is resolved.

Related columns:

- Fed wrestles with signs of a slowing economy (Reuters, March 22)

- Oil and equities prepare to party like it’s 1999 (Reuters, March 19)

- Hedge funds pause oil buying as fresh doubts about economy surface (Reuters, March 18)

- Fed’s next move more likely to be a cut in interest rates (Reuters, March 7)

Editing by David Evans

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