Investors Sell Petroleum Futures Amid Bearish Sentiment
Investors have been selling petroleum futures and options at an increasing rate, resulting in the most bearish sentiment seen since the middle of the year. Hedge funds and other money managers sold the equivalent of 57 million barrels in the six most crucial futures and options contracts over the seven days leading up to November 7th.
This follows a trend where fund managers have been selling for five out of the past six weeks, reducing their combined position by a total of 331 million barrels since September 19th. The combined position now stands at just 349 million barrels, which is the 13th percentile for all weeks since 2013. This is a significant decrease from the high of 680 million barrels recorded six weeks ago, demonstrating the increasingly bearish sentiment in the market.
The decline in positions can be traced back to the end of June when Saudi Arabia and its OPEC⁺ partners deepened their production cuts. At that time, the position dropped to 282 million barrels, the 5th percentile, before eventually climbing to the recent high in September. However, the bullish sentiment that dominated the market during the third quarter has since disappeared in October and November.
Historically, fund sales have been concentrated in crude oil, with last week’s sales representing a reduction of 52 million barrels. Both NYMEX and ICE WTI saw equal sales of 28 million barrels, while Brent experienced a decrease of 24 million barrels. The position in WTI, in particular, has become increasingly bearish. The position in NYMEX and ICE WTI has drastically fallen to just 90 million barrels, the 4th percentile, down from 286 million barrels at the end of September.
This reduction in WTI positions aligns with the stabilization of crude inventories around the NYMEX delivery point at Cushing, Oklahoma, as well as the easing of extreme backwardation in nearby calendar spreads. The sudden change in calendar spreads signifies the end of the squeeze on deliverable supplies, leading fund managers to adopt a more bearish stance on WTI prices.
Bearish short positions in the premier NYMEX WTI contract surged to 96 million barrels on November 7th from just 20 million at the start of October. This increase in short positions has raised the probability of a sharp reversal in the previous downward price trend when funds realize their profits. Additionally, it has heightened the risk of further action by OPEC⁺ to drive prices higher or initiate a renewed squeeze on deliverable inventories at Cushing.
Most traders anticipate that Saudi Arabia, Russia, and other OPEC⁺ allies will extend current production cuts beyond December until at least the end of March. Meanwhile, portfolio investors are struggling to adopt a bullish outlook on U.S. gas prices due to record production and a mild start to the winter heating season.
Investors have sold the equivalent of 380 billion cubic feet (bcf) in the seven days leading up to November 7th. Since July, funds have repeatedly attempted to become more bullish but have been forced to retreat due to high inventories. The net position on November 7th was 563 bcf, which is not significantly different from the position on July 11th.
Despite front-month futures prices being low in real terms, indicating a potential upside, fund managers who have amassed bullish long positions have consistently been proven wrong due to high production levels and mild weather conditions.
Overall, the selling of petroleum futures and options by investors reflects a growing bearish sentiment in the market. While many anticipate further actions by OPEC⁺ to boost prices, the persistence of high inventories and other factors continue to pose challenges for investors looking to take a more optimistic stance.
Disclaimer: The views expressed in this article are solely those of the author, John Kemp, a Reuters market analyst, and do not necessarily represent the views of the publication.
More detail via Reuters here… ( Image via Reuters )
