July 29, 2019 / 12:41 PM / 2 months ago

Hedge funds dump oil as fragile calm settles on Mideast: Kemp

LONDON (Reuters) - Hedge funds sold oil last week, reversing most of the purchases made the week before, as tensions in the Middle East reached a fragile equilibrium and prospect of armed conflict receded.

FILE PHOTO: Crude oil is dispensed into a bottle in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration

Hedge fund and other money managers were net sellers of 65 million barrels of futures and options linked to petroleum prices in the week to July 23, after buying 84 million barrels in the week to July 16.

The United Kingdom and Iran have now each detained a tanker and show signs of trying to negotiate a face-saving swap, which makes further seizures by either side unlikely for the time being. Maritime deterrence has been restored.

The United States, the United Kingdom, Saudi Arabia, the United Arab Emirates and Iran have all signaled a desire to avoid a further escalation of their disputes in the Gulf (tmsnrt.rs/2Mr91Sz).

With the maritime situation reaching a fragile equilibrium, at least temporarily, traders’ attention has switched back to flagging global growth and its impact sapping oil consumption.

Hedge funds last week sold Brent (-24 million barrels), NYMEX and ICE WTI (-33 million), U.S. gasoline (-9 million) and U.S. heating oil (-1 million) though they bought a small quantity of European gasoil (+3 million).

Portfolio managers were especially aggressive in shorting NYMEX WTI, where short positions leapt by almost 25 million barrels in the week to July 23, the largest one-week increase for almost two years.

The fundamental outlook for prices remains bearish with the market expected to remain oversupplied throughout the remainder of 2019 and into 2020.

The threat of armed conflict and disruption of supplies in the Gulf can induce volatility and produce vigorous short-covering rallies, as the tanker conflict has proved.

But once military tension subsides, the weakness in global manufacturing and trade and slack oil consumption has tended to put renewed pressure on prices.

Related columns:

- Global oil consumption stagnates leaving prices under pressure (Reuters, July 23)

- Hedge funds buy oil as price risks shift to the upside (Reuters, July 22)

- Fed will try to create firebreak to contain downturn (Reuters, July 19)

- Freight fuel prices subdued as economy outweighs IMO (Reuters, July 16)

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