Column: Hedge funds adjust to new normal in oil

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Kaombo Norte floating oil platform is seen from a helicopter off the coast of Angola
Kaombo Norte floating oil platform is seen from a helicopter off the coast of Angola, November 8, 2018. REUTERS/Stephen Eisenhammer

LONDON, May 9 (Reuters) - Investors made few changes to their petroleum positions last week as prices remained poised between fears of a reduction in supply from Russia and a global slowdown in demand.

There are signs traders have absorbed much of the initial shock from Russia’s invasion of Ukraine and the threat of sanctions, with positions, prices and volatility establishing new reference points.

Hedge funds and other money managers bought the equivalent of 7 million barrels in the six most important petroleum futures and options contracts in the week to May 3.

There were small purchases of Brent (+4 million barrels) and U.S. gasoline (+4 million) but no significant changes in NYMEX and ICE WTI, U.S. diesel or European gas oil.

The combined position of 558 million barrels has stayed basically unchanged for the last seven weeks since the middle of March.

(Chartbook: https://tmsnrt.rs/390vPGa)

Fund positions remain weighted towards refined products, especially diesel, reflecting the shortage of refining capacity and low fuel inventories.

Position changes have been small as traders weigh the offsetting impacts of sanctions on Russia’s oil exports and the disruptions to fuel demand caused by China’s lockdowns.

However, the total number of open futures contracts held by all types of traders increased for the first time in 11 weeks since Russia invaded Ukraine in late February.

The small increase was equivalent to just 20 million barrels and comes after open interest declined by 1,141 million barrels over the previous ten weeks.

The slight rise indicates the risk-reduction process may have run its course as prices and volatility have settled down after the initial shock caused by the invasion.

Related columns:

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

- Global manufacturers lose momentum as inflation worsens (Reuters, May 3) read more

- U.S. petroleum fills the gap left by Russia exports (Reuters, April 29) read more

- Oil prices paralysed between Russia sanctions and China lockdowns (Reuters, April 25) read more

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

Editing by Tomasz Janowski

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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.

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.

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