LONDON (Reuters) - Hedge funds stopped buying petroleum last week, as benchmark crude prices touched $30 per barrel, and evidence emerged of a persistent oversupply of middle distillates such as diesel and especially jet fuel.
Hedge funds and other money managers sold the equivalent of 19 million barrels in the six most important petroleum futures and options contracts in the week ending on May 12.
Portfolio managers had earlier bought 281 million barrels over the previous six weeks, according to an analysis of position records published by the U.S Commodity Futures Trading Commission and ICE Futures Europe.
Sales were concentrated in Brent (-21 million barrels), U.S. diesel (-6 million) and European gasoil (-9 million) and were partially offset by purchases in NYMEX and ICE WTI (+16 million) and U.S. gasoline (+2 million).
Fund managers liquidated 33 million barrels of previous long positions, while also closing out 14 million barrels of existing short ones.
Much of the earlier buying, which started in late March, was concentrated in WTI, driven by the expectation prices had reached unsustainably low levels.
The number of rigs drilling for oil in the United States has fallen by more than 350 or 60% since the wave of buying began, suggesting that view was broadly correct.
But with futures prices back over $30 per barrel, if they rise much more, some drilling will start to become economic again, perhaps limiting further upside potential for prices.
Continued price rises may also undermine the resolve of Saudi Arabia, Russia and the other members of the enlarged OPEC+ group of oil exporters to cut output.
After strong buying in the previous six weeks, some fund managers decided to trim their crude holdings, realising profits.
On the consumption side, there has been a significant recovery in demand for gasoline as lockdowns ease and road traffic picks up.
But there has been no recovery in passenger aviation, with surplus distillates that would normally be sent to the jet pool instead blended into the diesel pool.
The resulting oversupply of diesel caused fund managers to become small but significant sellers of both the U.S. diesel and European gasoil contracts last week.
John Kemp is a Reuters market analyst. The views expressed are his own.
- Recovering oil demand could drive market into deficit by July (Reuters, May 15)
- Oil traders see market starting road to recovery (Reuters, May 17)
- Hedge fund oil bulls switch to buying Brent (Reuters, May 11)
- U.S. motorists start returning to the road (Reuters, May 7)
Editing by David Evans