Portfolio investors purchased petroleum contracts for the first time in seven weeks as traders squared up short positions ahead of a meeting of OPEC⁺ ministers to decide production policy in the second half of 2024.
Hedge funds and other money managers purchased the equivalent of 21 million barrels in the six most important futures and options contracts over the seven days ending on May 28.
The purchases were the first after six weeks of sales totalling 304 million barrels since April 9, according to records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.
Most of the purchases came from closing out previous bearish short positions (+16 million barrels) rather than creating new bullish long ones (+6 million).
Even after short covering, the combined position was just 402 million barrels (19th percentile for all weeks since 2013) while bullish longs outnumbered bearish shorts by 2.51:1 (24th percentile).
Fund managers remained sceptical about the likelihood of price increases, even with prices close to the long-term average and OPEC⁺ ministers signalling they would prolong production restraint (agreed five days later).
In the most recent week, buying was heavily concentrated in NYMEX and ICE WTI (+32 million barrels) with small purchases in Brent (+2 million) and U.S. diesel (+2 million).
There were sales in both U.S. gasoline (-5 million barrels) and European gas oil (-9 million).
Fund managers continued to rotate away from the Brent international crude benchmark and towards the WTI U.S. regional marker.
Funds have purchased 89 million barrels of WTI in the most recent three weeks while selling 173 million barrels of Brent in the last four.
Some of this rotation has reflected evaporation of the previous war-risk premium in Brent, as the conflict between Israel, Iran, Hamas, Hezbollah and the Houthis has been contained.
But the increased bullishness around WTI could also be an indication of an impending squeeze on deliverable supplies around the contract’s delivery location at Cushing in Oklahoma.
Commercial crude inventories at Cushing depleted by almost 2 million barrels over the seven days ending on May 24, the largest drawdown for 17 weeks.
Cushing inventories were 11 million barrels (-25% or -0.76 standard deviations) below the prior 10-year seasonal average.
Even a few weeks of depletions could leave deliverable supplies extremely low and make the contract vulnerable to another squeeze.
U.S. natural gas
Fund managers have become progressively more bullish about the outlook for U.S. gas prices, anticipating that strong demand from gas-fired generators and the restart of LNG export facilities will eliminate excess inventories.
Funds purchased the equivalent of 316 billion cubic feet (bcf) in the two major contracts linked to prices at Henry Hub in Louisiana over the seven days ending on May 28.
Funds have been net buyers in five of the latest six weeks, purchasing a total of 1,365 bcf since April 16.
The fund community held a net long position of 881 bcf (53rd percentile for all weeks since 2010) up from a net short of 1,675 bcf (3rd percentile) in mid February and the most bullish position since the end of October 2023.
U.S. working gas inventories were still 616 bcf (+28% or +1.43 standard deviations) above the prior 10-year average on May 24.
But the surplus has been broadly stable or even narrowed slightly since the middle of March, implying production, consumption and exports are now close to balance after large surpluses in 2023 and early 2024.
If production starts to decline, following drilling cuts announced in February, or consumption rises faster, inherited inventories are likely to deplete over the next nine months, which has started to draw funds back into the market.
(Reuters – Writing by John Kemp, a Reuters market analyst. The views expressed are his own. Editing by Susan Fenton)
