COLUMN-Investors have become super-bullish about oil: Kemp
Since the announcement of the first successful coronavirus vaccines in late 2020, portfolio investors have rushed to invest in petroleum futures and options.
China’s exit from a zero-COVID strategy, along with hopes that the global economy can avoid a recession and low oil supplies, have contributed to an extraordinary wave of buying across the oil complex. Hedge funds and other money managers bought the equivalent of 232 million barrels in the top six futures and options contracts in the six weeks ended Jan. 24.
Buying since December 2020 has been the fastest in any six weeks, according to an analysis of position records released by ICE Futures Europe and the US Commodity Futures Trading Commission. In the last week, the fund managers bought the equivalent of 70 million barrels, mainly Brent (+40 million) and to a much lesser extent NYMEX and ICE WTI (+4 million).
But the buying spree spread beyond crude oil to include US gasoline (+11m barrels), US diesel (+8m barrels) and European gasoil (+7m barrels). Refinery closures linked to seasonal maintenance, as well as sanctions on Russia’s diesel exports, are expected to further drain fuel stocks.
Chartbook: Investor Petroleum Positions Net position across all six contracts increased to 575 million barrels (47th percentile for all weeks since 2013) from 343 million barrels (11th percentile) on December 13th.
Net position is highest since November 8th and before June 14th. There was a strong bullish bias, with long positions outperforming short positions at a ratio of 5.93:1 (80th percentile) versus 2.58:1 (23rd percentile) five weeks earlier.
The most optimistic metrics are concentrated on Brent (86th percentile), US gasoline (85th percentile) and US diesel (86th percentile), with less optimism on European gasoil (65th percentile) and WTI (41st percentile ). Refinery maintenance in the United States is expected to deplete fuel supplies there, but WTI prices will lag behind Brent, likely explaining the differential performance.
Hedge funds have been more bullish on Brent than at any time since May 2019, before the pandemic hit and turned the oil industry upside down. There is a growing tension at the heart of investor positioning.
In the bond market, investors are increasingly confident that inflation will moderate, allowing central banks to end rate hikes early. In the oil market, investors are increasingly certain that continued growth will result in tighter supplies and rising prices.
But that would be inflationary – and contradicts the favorable outlook that the bond market is implying. Oil traders and bond traders cannot both be right.
Related sections: – Recession now or later? Unenviable alternatives for 2023 (Reuters, January 26)
– Investors jump back into oil on rising economic optimism (Reuters, January 23) – Bullish oil investors look beyond China’s COVID wave (Reuters, January 3)
– Investors exit bullish oil positions as recession approaches (Reuters, 12 Dec) John Kemp is a market analyst at Reuters. The views expressed are his own. (editing by Bernadette Baum)
(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)