June 24, 2019 / 2:08 PM / 6 months ago

Column: Hedge funds pause oil sales as Mideast tensions rise

LONDON (Reuters) - Hedge fund liquidation of petroleum futures and options positions stalled last week as bearishness about the global economy was tempered by fears about a possible disruption of oil exports from the Gulf.

The Odebrecht Oil and Gas floating tanker is seen in the Guanabara bay in Rio de Janeiro, Brazil October 20, 2017. REUTERS/Bruno Kelly

Hedge funds and other money managers were net sellers of just 3 million barrels in the six most important futures and options contracts linked to petroleum prices in the week to June 18.

(Chartbook: tmsnrt.rs/2FtXsWx)

Portfolio managers have sold a total of 389 million barrels in the last eight weeks, but last week’s sales were the smallest so far, as tensions between the United States and Iran raised concerns about supply interruptions.

Funds were net sellers last week of Brent (-21 million barrels) and European gasoil (-1 million barrels) but buyers of NYMEX and ICE WTI (+12 million), U.S. gasoline (+1 million) and U.S. heating oil (+5 million).

Concerns about a global economic slowdown have been hitting oil prices as well as the price of a broad range of other commodities and equities since late April.

But the economic outlook has now weakened so much the U.S. Federal Reserve has signalled it may cut interest rates, which traders see as a possible bullish signal.

From a positioning perspective, the balance of price risks had already shifted towards the upside by early June, creating conditions for a short-covering rally.

By June 11, fund managers were running the most bearish position in U.S. heating oil for two years and the most bearish position in NYMEX and ICE WTI since the end of the oil slump in 2016.

In that context, tensions in the Strait of Hormuz as well as hopes for a U.S. interest rate cut and the renewal of trade talks between the United States and China all combined to trigger a bout of short covering.

There are still an elevated number of short positions that could be squeezed, pushing prices higher, if tensions in the Middle East worsen or there are signs of a re-acceleration in the global economy.

From a fundamental perspective, however, the outlook for oil remains bearish for the moment, with most global economic indicators pointing to a prolonged slowdown hitting oil consumption in the second half of the year.

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

Related columns:

- Global economic slowdown hits oil consumption (Reuters, June 19)

- Hedge funds sell more oil, but balance of risks is shifting (Reuters, June 17)

- Strait of Hormuz and the risk of uncontrolled escalation (Reuters, June 13)

- Hedge funds sell oil as economic fears intensify (Reuters, June 11)

Editing by Alexander Smith

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