Hedge funds and other institutional investors have turned cautious on oil prices, selling off a substantial 103 million barrels’ worth of futures and options contracts in the six major markets during the week ending July 23rd.
Decreasing Net Positions
This recent sell-off follows a trend of declining net positions over the past three weeks, totaling 144 million barrels.
According to records filed with ICE Futures Europe and the U.S. Commodity Futures Trading Commission, funds have reduced their net position to a mere 380 million barrels (19th percentile since 2013) from a recent peak of 524 million (35th percentile) on July 2nd.
Widespread Sales Across Markets
The latest week witnessed selling across all major contracts, including Brent (-38 million barrels), NYMEX and ICE WTI (-31 million), European gas oil (-21 million), U.S. gasoline (-9 million), and U.S. diesel (-5 million).
Despite reaching the halfway point of peak summer consumption, there has been only a minor reduction in oil inventories. U.S. stocks of crude oil and refined products like gasoline and diesel have remained close to their long-term seasonal averages in recent weeks.
Impact on Prices and Sentiment
The abundance of inventories has tempered the initial bullishness among traders, causing spot prices, calendar spreads, and crack spreads to decrease.
While funds maintain a neutral to slightly bearish stance on U.S. crude, they have become notably bearish towards Brent and all refined fuels.
Factors Influencing Investor Sentiment
The anticipated rebound in manufacturing activity across North America, Europe, and China has lost momentum since April. Additionally, high interest rates continue to deter consumers from purchasing expensive durable goods like new cars and appliances.
The post-pandemic surge in travel and tourism also shows signs of slowing down due to rising prices and cost-of-living pressures.
Delay in Inventory Depletion
The expected depletion of global petroleum inventories has been repeatedly postponed this year, and it appears to have been delayed once again.
U.S. Natural Gas Market
Investors have started buying futures and options linked to U.S. natural gas prices for the first time in five weeks, driven by a decline in inflation-adjusted prices back towards multi-year lows.
Increased Purchases After Weeks of Selling
Hedge funds and other money managers purchased the equivalent of 151 billion cubic feet (bcf) of natural gas futures and options contracts at Henry Hub in Louisiana during the week ending July 23rd.
This modest buying followed a substantial selling spree of 980 bcf over the previous four weeks, according to filings with the futures regulator.
Persistent Inventory Surplus
Working gas inventories remain well above average for this time of year, showing limited signs of normalization after an unusually mild winter in 2023/24.
Stocks are the second-highest on record for this period and still 479 bcf (17% or +1.35 standard deviations) above the prior 10-year seasonal average.
Factors Affecting Inventory Levels
The surplus has decreased slowly despite hotter-than-normal temperatures boosting air conditioning demand, slower wind speeds, and low gas prices encouraging more gas-fired power generation.
Limited Depletion Potential and Price Pressure
With the U.S. air conditioning season past its halfway mark, the potential for further inventory depletion is limited. Working inventories are likely to enter the winter heating season above average.
This persistent surplus has pushed front-month futures prices below $2 per million British thermal units (MMBtu) in an attempt to maximize gas-fired generation and curb further stock accumulation.
Investor Caution Despite Low Prices
Ultra-low prices have incentivized some fund managers to take profits by repurchasing previously bearish short positions, accounting for two-thirds of all buying in the most recent week.
However, the broader hedge fund community remains cautious about a potential price rebound, even from these exceptionally low levels.
Fund managers currently hold a net position of just 341 bcf in the two major contracts, placing it in the 42nd percentile for all weeks since 2010.