Column: Oil funds trapped between low inventories and a slowing economy: Kemp
LONDON, Oct 31 (Reuters) – Portfolio investors’ oil positions are showing significant week-to-week volatility as traders struggle to anticipate the net effect of an economic slowdown amid stocks exceptionally low crude and diesel.
Hedge funds and other money managers bought the equivalent of 33 million barrels in the six largest oil futures and options contracts in the week to October 25.
The previous four weeks saw two big buys (+62m and +47m barrels) and two big sells (-34m and -50m barrels) as investor sentiment shifted.
The mixed picture continued last week, with big Brent buying (+29m barrels) and smaller buying NYMEX and ICE WTI (+6m) and US gasoline (+6m). ).
But this was partly offset by weak sales of US diesel (-4 million) and European diesel (-2 million).
Fund managers still have an overall bullish bias on oil, with longs outnumbering shorts by a ratio of 5.17:1 (66th percentile for all weeks since 2013).
But uncertainty is high and confidence is low, with a net position of just 503 million barrels (33rd percentile for all weeks since 2013).
In Brent, the long-short ratio is in the 75th percentile (bullish) but the net position is only in the 41st percentile (relatively low confidence).
In middle distillates, the long-short ratio is in the 74th percentile, but the net position is more modest in the 58th percentile.
card book: Trader CFTC and ICE Commitments
U.S. and global crude oil and distillate inventories are at their seasonal lows in decades, creating an upward bias for prices.
But the US Federal Reserve is raising interest rates at the fastest rate in 40 years to drive inflation out of the economy.
And most other major central banks are following suit, leading to a rapid tightening of financial conditions around the world.
The resulting cyclical slowdown should dampen crude and distillate consumption and rebuild inventories to more comfortable levels.
The timing of any rebuilding is uncertain, however, and inventories could remain tight or even depleted further in the near term.
In addition to purely economic factors, EU sanctions on shipping and insurance services for Russian crude and distillate exports expected to come into effect in December and February could further tighten supply.
With so many conflicting factors, traders and investors find it difficult to form a mid-term outlook on price with conviction, leaving the market directionless in the meantime.
– Oil investors on the defensive as recessionary forces intensify (Reuters, October 24)
– OPEC⁺ cuts draw funds to oil market (Reuters, October 17)
— Diesel’s grim message for the global economy (Reuters, October 14)
– OPEC⁺ cut brings speculative funds back to oil market (Reuters, October 10)
– John Kemp is a market analyst at Reuters. Opinions expressed are his own.
Editing by Jan Harvey
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