LONDON (Reuters) - Hedge funds continued to buy oil derivatives last week, anticipating the oil market has entered an upward price cycle as the global economy steadies and the surge in shale production fades.
Hedge funds and other money managers purchased the equivalent of 26 million barrels of futures and options in the six major petroleum contracts in the week to Nov. 5.
Fund managers were buyers of ICE Brent (+28 million barrels), NYMEX and ICE WTI (+14 million) and U.S. gasoline (+4 million), while selling some U.S. heating oil (-8 million) and European gasoil (-12 million).
Funds have purchased 135 million barrels in the six main contracts over the last four weeks, after selling 206 million barrels in the three weeks before that, according to exchange and regulatory data.
The hedge fund community is a net owner of 572 million barrels of petroleum futures and options, up from 437 million barrels in early October but well below the recent high of 911 million in April.
Bullish long positions outnumber bearish shorts by a ratio of 3.26:1, up from 2.61 in early October, though still far below the recent high of 8.68 in April.
In aggregate, the fund community appears cautiously optimistic about the outlook for oil prices because of a combination of fundamental and positioning factors.
On the consumption side, the global economic outlook appears to have stabilised over the last two months. There are no signs of improvement yet, but no evidence of a further deterioration.
On the production side, U.S. shale production growth is already slowing in response to lower prices, and Saudi Arabia and its allies in OPEC+ are signalling current output restraints will be extended well into 2020.
From a positioning perspective, hedge fund longs remain modest at just 825 million barrels, down from more than 1 billion in April, indicating there is plenty of scope for more buying if the news flow improves.
Short positions total 253 million barrels, more than double the recent low, so there is plenty of room for a further short squeeze if prices continue to rise.
On most measures, the balance of price risks has swung towards the upside, at least in the short term, provided there is no renewed flare up in the U.S./China trade war or another downturn in global economic growth.
John Kemp is a Reuters market analyst. The views expressed are his own.
- Hedge funds buy oil in anticipation of short-covering rally (Reuters, Nov. 4)
- U.S. refiners’ restraint cuts gasoline, diesel oversupply (Reuters, Nov. 1)
- Hedge funds looking for the low in the oil market (Reuters, Oct. 28)
- Hedge funds hold fire after two weeks of heavy selling in oil (Reuters, Oct. 21)
Editing by Kirsten Donovan