LONDON (Reuters) - Hedge funds are becoming increasingly bullish on oil prices amid signs of slowing production growth as a result of output cuts by Saudi Arabia and a reduction in U.S. shale drilling.
Hedge funds and other money managers bought 37 million barrels of futures and options in the six most important contracts linked to petroleum prices in the week to March 26.
Funds have boosted their bullish position in the six major contracts by a total of 421 million barrels over the last 11 weeks, according to position reports published by regulators and exchanges.
The fund community’s net long position has climbed to 723 million barrels, up from just 302 million barrels on Jan. 8, though still well below the recent high of 1.099 billion barrels on Sept. 25.
In the week to March 26, portfolio managers bought 29 million barrels of WTI-linked futures and options, taking total purchases to 158 million barrels since Jan. 8.
Hedge funds also bought 13 million barrels of Brent contracts in the most recent week and have purchased a total of 186 million since Dec. 11.
On the products side, investors were net buyers of 6 million barrels of U.S. gasoline contracts, taking total purchases to 51 million barrels since the end of January.
But there was less enthusiasm for middle distillates such as U.S. heating oil and European gasoil, notwithstanding the introduction of new ship fuel regulations at the start of next year which should boost consumption.
Fund managers were net sellers of both heating oil (-5 million barrels) and gasoil (-7 million barrels) last week.
Portfolio managers now hold an overall bearish short position in U.S. heating oil; while they are still net long in gasoil, the position has declined for two weeks running.
The improvement in sentiment since the start of the year has come as much from a reduction in short positions (down by 188 million barrels, 53 percent) as an increase in long ones (up 233 million barrels, 35 percent).
Oil traders have become less worried about over-supply as Saudi Arabia and its allies in the expanded OPEC group of oil exporters have cut their production sharply.
The previous surge in U.S. oil production also shows signs of decelerating, with the number of rigs drilling for oil falling by 69 (8 percent) since the end of 2018, according to oilfield services company Baker Hughes.
Brent futures prices for the second half of the year have swung into backwardation, signalling that traders expect oil inventories to fall.
At the same time, U.S.-China trade tensions and fears about a global recession have eased somewhat, and investors are increasingly optimistic the U.S. Federal Reserve will cut interest rates if growth slows any further.
Lower oil prices since last summer should also support faster growth in gasoline consumption, evidenced by a slight uptick in vehicle-miles travelled in the United States towards the end of 2018.
Prospects for rapidly slowing production growth and resilient consumption have removed the bearish bias in the market at the start of the year and encouraged investors to become cautiously bullish.
The White House has made clear its preference for lower oil prices, but traders seem convinced Saudi Arabia will continue to tighten the market, at least until Brent prices reach the mid-$70s per barrel.
The weak spot in the market is middle distillates, where lingering fears about global growth and trade flows continue to discourage aggressive position-building.
John Kemp is a Reuters market analyst. The views expressed are his own.
- Trump and Saudi Arabia at odds over oil prices (Reuters, March 29)
- Oil traders wait to assess impact of IMO regulations (Reuters, March 27)
- Hedge funds increase appetite for oil (Reuters, March 25)
- Oil and equities prepare to party like it's 1999 (Reuters, March 19)
editing by David Evans