Column: OPEC+ cut draws hedge funds back into the oil market

Pump jacks operate in front of a drilling rig in an oil field in Midland
REUTERS/Nick Oxford

LONDON, Oct 10 (Reuters) - Portfolio investors were encouraged to return to the oil market early last week by the prospect of production cuts by OPEC and its allies, which offset some bearishness induced by the prospect of an imminent recession.

Hedge funds and other money managers purchased the equivalent of 62 million barrels in the six most important petroleum futures and options contracts in the week ending Oct. 4., according to regulators' records.

Fund buying concentrated on crude (+46 million barrels) rather than fuels (+15 million) and came ahead of a decision by OPEC+ on Oct. 5 to cut the group's combined output allocations by 2 million barrels per day.

Portfolio managers purchased Brent (+27 million barrels), NYMEX and ICE WTI (+19 million), European gas oil (+6 million), U.S. diesel (+6 million) and U.S. gasoline (+4 million).

Buying was concentrated in the contracts which had seen the heaviest sales since the summer amid expectations that petroleum consumption will be hit by an impending recession.

As a result, the combined crude position climbed to 360 million barrels (18th percentile for all weeks since 2013) up from 314 million barrels (10th percentile) the previous week.

The combined distillate position increased to 56 million barrels (45th percentile) from 45 million (40th percentile) the week before.

Chartbook: CFTC and ICE commitments of traders

Market talk and pre-meeting briefings by officials about a reduction in allocations seem to have lifted hedge fund positions in advance of the formal OPEC+ decision.

The number of short positions across all six contracts fell by 26 million barrels, one of the largest reductions this year, while long positions increased by 36 million.

In consequence, bullish positions outnumbered bearish shorts by 4.63:1 (58th percentile) up from 3.63:1 (40th percentile) on Sept. 27.

Reduced output allocations have blunted the bearish momentum building up in the market and encouraged at least some fund managers to rebuild positions in anticipation of renewed tightness and higher prices.

Related columns:

- Oil investors ready for recession (Reuters, Oct. 3)

- Hedge funds dump distillates as recession risks intensify (Reuters, Sept. 26)

- Recession will be necessary to rebalance the oil market (Reuters, Sept. 22)

- Oil prices and financial markets brace for recession (Reuters, Sept. 15)

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

Editing by David Evans

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Thomson Reuters

John Kemp is a senior market analyst specializing in oil and energy systems. Before joining Reuters in 2008, he was a trading analyst at Sempra Commodities, now part of JPMorgan, and an economic analyst at Oxford Analytica. His interests include all aspects of energy technology, history, diplomacy, derivative markets, risk management, policy and transitions.