Portfolio investors have halted their petroleum buying as benchmark crude prices approach $100 per barrel, leading to concerns about an overcrowded trade and profit-taking. Over a seven-day period ending on September 26, hedge funds and other money managers sold the equivalent of 25 million barrels in the six most important petroleum futures and options contracts. This marked a shift from the previous four weeks, during which fund managers had purchased 155 million barrels.
While funds continued to purchase NYMEX and ICE WTI (+16 million barrels) due to the tightening crude inventories in Cushing, Oklahoma, they became net sellers of Brent (-22 million barrels) in the most recent week. The net position in Brent, currently at 244 million barrels, is not significantly different from the long-term average of 232 million barrels, signaling uncertainty about future prices.
On the product side, fund managers were significant sellers of U.S. gasoline (-13 million barrels) and European gas oil (-7 million barrels), partially offset by small buying of U.S. diesel (+2 million barrels). Despite this, the depletion of crude inventories at Cushing continues to attract hedge funds to build long positions and benefit from the inventory squeeze.
However, caution is emerging among investors as prices have already surpassed the long-run inflation-adjusted average, while persistent inflation is worsening the economic outlook. This caution is reflected in the increasingly bearish outlook for U.S. gas prices, despite the progressive elimination of the large inventory surplus from 2022. Hedge funds sold the equivalent of 380 billion cubic feet in the two most important futures and options contracts tied to prices at Henry Hub in Louisiana, resulting in a net short position of 273 billion cubic feet.
Although working inventories were just 75 billion cubic feet above the ten-year seasonal average on September 22, forecasts from the U.S. Climate Prediction Center indicate above-average temperatures across much of the country in October. Furthermore, strong El Nino conditions in the Pacific are expected to reduce heating demand and gas consumption below average during the peak winter months between December and February. These factors are contributing to the bearish sentiment among hedge funds regarding winter 2023/24.
Overall, the petroleum market is experiencing a shift in investor sentiment, with portfolio investors scaling back their buying due to concerns about overcrowding and profit-taking. While funds continue to purchase certain petroleum products, caution is mounting as prices rise above the long-run average and economic uncertainties persist.
More detail via Reuters here… ( Image via Reuters )