Money managers fled the oil market in the week to May 2, reversing two weeks of buying petroleum futures and contracts spurred by the new production cuts announced by several large OPEC+ members in early April.
A month after the OPEC+ group surprised the oil market by announcing additional cuts to production between May and December 2023 to ensure the “stability of the market,” oil prices are where they were just before the announcement, in the mid-$70s per barrel Brent.
The initial euphoria from an expected additional market tightening gave way to renewed concerns about the macroeconomic backdrop with a recession looming. Continued concerns about the banking sector did not help the bullish narrative either.
So hedge funds and other money managers cut their bullish bets in the most traded petroleum futures and options contracts for a second consecutive week in the week to May 2, reversing the more bullish positions they had amassed in the two weeks after OPEC+ announced the latest production cuts.
WTI Crude, the U.S. benchmark, saw the biggest drop in the net long position – the difference between bullish and bearish bets – in six weeks in the week to May 2, data from the U.S. Commodity Futures Trading Commission (CFTC) showed.
In the petroleum complex, including WTI, Brent, European gasoil, U.S. diesel, and U.S. gasoline, the ratio of bullish to bearish bets slumped to just 2.22 to 1 as of May 2, Reuters’ senior market analyst John Kemp notes, as traders slashed longs and added shorts. Related: Texas Natural Gas Prices Turn Negative
To compare, the longs-to-shorts ratio was 5 to 1 in the middle of April when traders were buying crude and many short sellers were caught off-guard by the OPEC+ cuts. Back in early April, a massive short covering and a renewed buying spree in oil futures followed in the two days after OPEC+ said it would keep another more than 1 million bpd off the market for the rest of the year.
In the latest reporting week to May 2, money managers cut their long positions and added short positions, thus reducing their net bullish bets in both WTI Crude and Brent Crude futures and options contracts. Brent, WTI, and European gasoil – the proxy for diesel – were the hardest hit by selling.
The traders’ positioning in the benchmark U.S. and European diesel futures even showed a net short position, one in which bearish bets outnumber bullish ones. The net short position in ICE gasoil futures continued to swell to a fresh high in more than seven years, suggesting that traders are increasingly concerned about future diesel demand and expect a recession.
In the previous reporting week to April 25, selling in distillates had accelerated and ICE gasoil flipped to a net short for only the third time in seven years, while the net long in ULSD – the benchmark diesel futures for fuel delivered into New York Harbor – was slashed by 44% to a 27-month low.
In the U.S., signs have emerged in recent weeks that U.S. diesel demand and prices have weakened this year as freight and industrial activities have slowed amid higher interest rates and falling consumer demand for goods. Some refiners are already seeing a drag on diesel demand caused by the sticky inflation, while transportation and logistics firms say a “freight recession” is already happening, and smaller trucking companies are folding up.
Speculators have been consistently caught off-guard in the past two months, and many have now opted to stay away. Lower open interest and liquidity in the market is bound to make price swings even more extreme, according to analysts.
Despite the bearish sentiment in the oil market, analysts and investment banks still see higher crude oil prices at the end of this year, with demand set to pick up with the driving season, and supply expected to tighten with the OPEC+ cuts in the second half of 2023.
By Tsvetana Paraskova for Oilprice.com
