Column: Oil investors on defensive as recession forces intensify
LONDON, Oct 24 (Reuters) - Portfolio investors abruptly reversed course last week as the optimism caused by OPEC+ production cuts at the start of October crumpled to be replaced by pessimism stemming from the worsening economic outlook.
Hedge funds and other money managers sold the equivalent of 50 million barrels in the six most important petroleum futures and options contracts in the week to Oct. 18.
Sales were the fastest for three months and came after purchases totalling 109 million barrels over the two previous weeks.
The most recent week saw heavy selling of NYMEX and ICE WTI (-29 million barrels) and Brent (-24 million) reversing the previous trend, as well as light sales of U.S. gasoline (-3 million).
But there was continued buying of U.S. diesel (+4 million barrels) and European gas oil (+2 million), extending the pattern from earlier in October.
Chartbook: CFTC and ICE commitments of traders
Investors are bracing for a severe downturn in the global business cycle as manufacturing slows but inflation proves persistent ensuring interest rates continue to rise.
Consumption of middle distillates such as diesel and gas oil are the most sensitive to the business cycle and would be hardest hit in the event of a downturn.
But mid-distillate inventories are currently so low around the world that prices are expected to remain relatively strong in any downturn until inventories have normalised.
Bullish long positions in distillates outnumber bearish short ones by a ratio of 5.76:1 (83rd percentile for all weeks since 2013) up from 2.35:1 on Sept. 27 (45th percentile).
Fund managers have become more bullish about distillates even as the economic outlook has worsened in a sign of how extraordinarily tight supplies have become on the eve of an anticipated recession.
- OPEC⁺ cuts attract funds back to oil market (Reuters, Oct. 17)
- Diesel’s gloomy message for the global economy (Reuters, Oct. 14)
- OPEC⁺ cut draws hedge funds back into the oil market (Reuters, Oct. 10)
- Oil investors ready for recession (Reuters, Oct 3)
- Hedge funds dump distillates as recession risks intensify (Reuters, Sept 26)
John Kemp is a Reuters market analyst. The views expressed are his own
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