Oil sees more fund buying, but risks shifting
Hedge fund managers were substantial buyers of petroleum futures and options last week for the fourth week in a row, a sign of increasing confidence coronavirus vaccines will drive a recovery in oil consumption next year.
Fund managers purchased crude and distillates, even as OPEC+ prepared to lift oil production, implying that a business cycle upturn and resumption of international aviation is expected to absorb extra output.
Funds purchased the equivalent of 44 million barrels in the six most important petroleum futures and options contracts in the week to Dec. 1, taking total purchases over the four most recent weeks to 304 million barrels.
The net position held by hedge funds and other money managers has been raised to 661 million barrels, the highest level since July-August, between the first and second waves of coronavirus, and before that January.
The combined position has risen to the 64th percentile for all weeks since the start of 2013, up from the 15th percentile on Nov. 3, just before the first successful vaccine trials were announced (tmsnrt.rs/3ot2PcA).
Last week’s purchases focused on Brent (+28 million barrels), European gasoil (+9 million) and U.S. diesel (+6 million) with smaller volumes in NYMEX and ICE WTI (+6 million), partly offset by sales of U.S. gasoline (-5 million).
The concentration on Brent and middle distillates, which include jet fuel, implies traders anticipate a recovery in consumption driven mostly by a business cycle upswing and an early return to cross-border passenger aviation.
Nearly all the buying was driven by repurchases of previous short positions (+42 million barrels) rather than the creation of new long positions (+1 million).
Fund managers see a vaccine eliminating much of the downside risk in the economy and the oil market, but as prices climb towards $50 they are becoming more cautious about the potential for further increases.
With long positions already outnumbering shorts by 4:1, up from 2:1 four weeks ago, the balance of risks is starting to shift from positive or neutral to slightly negative, at least from a positioning perspective.
Portfolio managers have anticipated an early, strong and consistent recovery, leaving the market vulnerable to a pull back if there is any delay or setback in vaccination and the lifting of quarantine restrictions.
The balance of risks will shift significantly if Brent prices climb above $50, and especially if they rise towards $55, where the internal cohesion of OPEC+ would come under strain, and prices would draw a significant increase in drilling from U.S. shale producers.