LONDON – Rallying oil prices ran out of steam just before the end of the year as investors turned cautious after two weeks of heavy petroleum buying.
Hedge funds and other money managers sold the equivalent of 12 million barrels in the six most important petroleum-related futures and options contracts over the seven days ending Jan. 3.
Light selling emerged after funds had purchased 103 million barrels over the preceding two weeks, according to position records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.
In the most recent week, purchases of Brent (+18 million barrels), European gas oil (+3 million) and U.S. gasoline (+1 million) were more than offset by sales of NYMEX and ICE WTI (-30 million) and U.S. diesel (-2 million).
Investors are much more bullish about the outlook for middle distillates such as diesel and gas oil on account of low inventories than they are towards crude oil contracts.
Bullish long positions outnumber bearish short ones by a margin of 3.86:1 (64th percentile for all weeks since 2013) in middle distillates compared with 3.06:1 (25th percentile) in crude oil.
Distillate consumption is very closely correlated with manufacturing and freight activity so it will be hit hard by any downturn in the global business cycle.
But global distillate inventories remain severely depleted after an unprecedented drawdown between the middle of 2020 and the middle of 2022.
The low starting level of inventories is likely to keep distillate prices relatively firm during the first phases of any business cycle downturn.
