LONDON (Reuters) - Hedge funds began trimming short positions in petroleum last week as crude oil prices fell to crisis levels for some producers and refiners and traders started to anticipate shutdowns at oilfields and refineries.
Extreme high and low prices are usually fleeting because they are dynamically unstable and contain the seeds of their own destruction, forcing large and accelerated adjustments from consumers and producers.
U.S. crude and distillate prices have been hit harder than Brent or gasoline, so fund managers seem to be anticipating they have the most potential for a short-term reversal.
Hedge funds and other money managers were net sellers of just 8 million barrels in the six major petroleum futures and options contracts in the week ending March 24.
The rate of sales slowed from an average of 78 million barrels in the three previous weeks, according to position records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.
In recent weeks, U.S. crude and middle distillate fuels such as jet fuel and diesel have been among the hardest hit parts of the petroleum market.
In the course of this month, U.S. cash crude prices for oil delivered to the Cushing storage hub have fallen to their lowest since the first oil shock in 1973, after adjusting for inflation.
Ultra-low prices and fast rising stocks mean current prices and production are unlikely to be sustainable for very long, forcing some field production to be shut in and refineries to cut processing.
Portfolio managers already seem to be positioning for prices to hit some sort of floor with some reducing previous bearish short positions.
Fund managers scaled back their combined short positions across the six major contracts for the second week running to 313 million barrels, down from a recent peak of 365 million barrels on March 10.
Last week, funds continued to sell Brent (-21 million barrels) and U.S. gasoline (-10 million), but made little change in U.S. diesel (-1 million) and were net buyers of European gasoil (+6 million) and U.S. crude (+18 million).
Funds have been net buyers of U.S. crude for three weeks, increasing their position by a total of 46 million barrels after reducing it by 214 million over the previous eight weeks.
From a positioning perspective, the concentration of short positions that will eventually need to be repurchased, combined with the relative lack of long positions that could still be liquidated, suggests price risks have shifted to the upside.
From a fundamental perspective, too, price risks have started to shift to the upside, because prices at the lowest for almost 50 years are unlikely to be sustainable for very long.
High-cost oil producers across much of North America are already losing money on every barrel produced which will soon force output cuts to conserve cash.
The number of rigs drilling new wells fell at the fastest rate last week for almost five years as shale producers idled rigs to reduce outlays.
Oil refiners around the world also face a crunch as consumption of refined fuels plunges and storage space fills up quickly, which will soon force cuts in processing.
Current levels of oil production and refining are unsustainable, which will ensure something gives way within the next few weeks and is why some portfolio managers have started to trim their bearish short positions.
John Kemp is a Reuters market analyst. The views expressed are his own.
- Global oil storage to fill rapidly as consumption plunges, Reuters, March 27
- Oil slump overwhelms hedge-fund short covering, Reuters, March 23
- Global economy hit by severest shock since 1930s, Reuters, March 20
Editing by Alexander Smith