Column: Recession risk keeps funds cautious on oil despite sanctions: Kemp

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An aerial view shows oil tank cars and railroad freight wagons in Omsk
An aerial view shows oil tank cars and railroad freight wagons in Omsk, Russia May 24, 2022. Picture taken with a drone. REUTERS/Alexey Malgavko/File Photo

LONDON, May 30 (Reuters) - Portfolio investors turned cautious on oil again last week after a sharp burst of buying the week before, amid uncertainty about whether recession or sanctions will dominate prices over the next six months.

Hedge funds and other money managers sold the equivalent of 5 million barrels in the six most important petroleum-related futures and options contracts in the week to May 24. (https://tmsnrt.rs/3z6Kg6n)

Renewed sales came after investors purchased 56 million barrels the week before, the fastest buying for four months, according to data from ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

In the most recent week, Brent buying (+13 million barrels) was more than offset by sales of NYMEX and ICE WTI (-8 million), U.S. gasoline (-4 million), European gas oil (-3 million) and U.S. diesel (-2 million).

The hedge fund community still has a strong bullish bias towards petroleum, with long positions outnumbering bearish short ones by a ratio of almost 6:1, in the 78th percentile for all weeks since 2013.

But their conviction remains modest, with a combined long position of only 599 million barrels, only in the 47th percentile, reflecting the conflicting risks from recession and sanctions.

Prices are already well above the long-term average in real terms, especially for refined fuels such as diesel and gasoline, increasing the risk of a reversal, while elevated volatility makes maintaining positions more expensive.

In a sign of the growing threat of an economic slowdown, funds continued to cut their positions in middle distillates such as diesel and gas oil, the most cyclically sensitive part of the petroleum market.

Fund managers have trimmed their positions in mid-distillates in 12 of the last 16 weeks by a total of 78 million barrels (54%) since the start of February, as fears of a slowdown have intensified.

Related columns:

- Hedge funds more bullish on crude as sanctions loom (Reuters, May 23) read more

- Oil hedge funds caught between sanctions and recession (Reuters, May 16) read more

- Hedge funds adjust to new normal in oil (Reuters, May 9) read more

- U.S. distillate stocks fall critically low (Reuters, May 5) read more

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

Editing by David Holmes

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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.

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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.

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