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Petroleum Prices Lose Momentum as Positions Reach Long-Term Averages

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Short-Covering Rally of Petroleum Prices Loses Momentum

Last week, the short-covering rally that had previously pushed petroleum prices higher came to a halt. Prices and positions in the market climbed near to or above long-term averages, making it difficult to determine the risk-reward calculation.

The traditional seasonal slowdown in the middle of August, as many senior trading and investment staff across North America and Europe go on holiday, likely affected position-taking as well.

According to reports, hedge funds and other money managers did not make any net changes in their combined position across the six most important oil-related futures and options contracts in the seven days leading up to August 15.

While there were purchases of Brent (+20 million barrels), U.S. gasoline (+6 million barrels), and European gas oil (+4 million barrels), there were also sales of NYMEX and ICE WTI (-29 million barrels) and U.S. diesel (-1 million barrels).

The combined position of 558 million barrels was in the 45th percentile for all months since 2013. The ratio of bullish long positions to bearish short ones stood at 4.23:1, which was in the 53rd percentile.

It is worth noting that the combined position has risen from a recent low of just 282 million barrels (5th percentile) at the end of June.

Fund managers were reportedly more optimistic about the outlook for refined fuels, including diesel and gasoline, due to low inventories. The net positions for fuels ranged from the 70th to 80th percentiles, while the position for crude oil was only in the 26th percentile.

In the seven days leading up to August 15, hedge fund and money manager positions in U.S. natural gas remained unchanged. It seemed that fund managers reduced both long and short positions by a similar amount (183 billion cubic feet) as a risk-reducing move following the recent increase in prices and positions.

Currently, funds hold a net long position of 707 billion cubic feet, which is in the 47th percentile for all weeks since 2010. This is an improvement from the net short position of 1,061 billion cubic feet at the end of January.

On August 11, working gas inventories in underground storage were +188 billion cubic feet, which is 7% or +0.58 standard deviations above the prior 10-year seasonal average. This shows a consistent narrowing of the surplus from +299 billion cubic feet at the end of June.

These developments in the petroleum and natural gas markets have garnered the attention of industry experts. John Kemp, a market analyst at Reuters, has shared his insights on the situation, which are his own views.

Overall, the recent leveling off of petroleum prices and positions, along with the cautious stance taken by fund managers, indicate a period of uncertainty in the energy markets. Industry players will be closely monitoring inventories and market dynamics for any potential shifts in the coming weeks.

More detail via Reuters here… ( Image via Reuters )

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