Column: Hedge fund petroleum buying paused over year end

Crude oil storage tanks are seen from above at the Cushing oil hub, in Cushing, Oklahoma, U.S., March 24, 2016. REUTERS/Nick Oxford/File Photo

LONDON, Jan 9 (Reuters) - Rallying oil prices ran out of steam just before the end of the year as investors turned cautious after two weeks of heavy petroleum buying.

Hedge funds and other money managers sold the equivalent of 12 million barrels in the six most important petroleum-related futures and options contracts over the seven days ending Jan. 3.

Light selling emerged after funds had purchased 103 million barrels over the preceding two weeks, according to position records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

In the most recent week, purchases of Brent (+18 million barrels), European gas oil (+3 million) and U.S. gasoline (+1 million) were more than offset by sales of NYMEX and ICE WTI (-30 million) and U.S. diesel (-2 million).

Chartbook: Petroleum positions

Investors are much more bullish about the outlook for middle distillates such as diesel and gas oil on account of low inventories than they are towards crude oil contracts.

Bullish long positions outnumber bearish short ones by a margin of 3.86:1 (64th percentile for all weeks since 2013) in middle distillates compared with 3.06:1 (25th percentile) in crude oil.

Distillate consumption is very closely correlated with manufacturing and freight activity so it will be hit hard by any downturn in the global business cycle.

But global distillate inventories remain severely depleted after an unprecedented drawdown between the middle of 2020 and the middle of 2022.

The low starting level of inventories is likely to keep distillate prices relatively firm during the first phases of any business cycle downturn.

Related columns:

- U.S. manufacturing downturn will cut diesel consumption (Reuters, Jan. 5)

- Bullish oil investors look beyond China's COVID wave (Reuters, Jan. 3)

- Hedge fund oil sales slow as balance of risks shifts (Reuters, Dec. 19)

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

Editing by David Evans

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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.