(John Kemp is a Reuters market analyst. The views expressed are his own)
LONDON – Hedge funds remain bullish on the outlook for oil but inflows of new money have dried up over the last month as prices have hit multi-year highs and global inflation concerns have grown.
In the six most important petroleum-related futures and options contracts, hedge funds and other money managers held a net long position equivalent to 847 million barrels on Oct. 26, exactly the same as Sept. 28.
Over the last four weeks, fund managers have twice made small additions to their net position, and twice small reductions, signifying a loss of momentum and direction for now.
By contrast, they added 110 million barrels over the previous four-week period, records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission showed (tmsnrt.rs/31aMumm).
In the most recent week, funds cut their net long position by 18 million barrels, with reductions in Brent (-18 million) and NYMEX and ICE WTI (- 7 million), partly offset by additions in U.S. gasoline (+4 million), U.S. diesel (+1 million) and European gas oil (+1 million).
In barrels, the net position across all six contracts is in the 76th percentile for all weeks since 2013, while the ratio of long to short positions is in the 83rd percentile.
Bullishness focuses on distillates such as diesel and gas oil (where the long-short ratio is in the 99th percentile) and WTI (90th percentile) with lower positioning in gasoline (67th percentile) and Brent (47th percentile).
Portfolio managers are bullish on distillates because of their high-gearing to the business cycle as well as potential to benefit from fuel-switching this winter in the northern hemisphere as a result of high gas and coal prices.
WTI is being lifted by the sharp draw in inventories around the delivery point for the NYMEX contract at Cushing, which has sent the market into an intense backwardation and supported nearby contract prices.
But in the wider market, typified by Brent and gasoline, optimism about the business cycle is tempered by concern about a possible coronavirus resurgence and macroeconomic risks posed by an increase in inflation.
OPEC+ appears comfortable with the rising trend in oil prices but it is drawing increasing diplomatic pushback from governments in consuming-countries, notably the United States.
In real terms, crude prices are already above their long-term average, and the rapid escalation over the last year is adding to global inflationary pressures, drawing increasing concern from central banks.
With Brent prices having more than doubled since the first successful vaccines were announced eleven months ago, and hedge fund positioning somewhat stretched, the balance of risks is no longer clearly to the upside.
Most fund managers appear content to maintain long positions in case prices surge further, but the appetite for adding even more to them appears to have faded for the time being.
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