Hedge funds sold petroleum futures and options for the second week running as the post-attack bounce in oil prices evaporated and attention shifted to the deteriorating condition of the global economy.
Hedge funds and other money managers sold the equivalent of 96 million barrels in the six most important futures and options contracts linked to oil prices in the week to Oct. 1, the largest reduction in nearly four months.
Fund managers have sold a total of 111 million barrels in the two most recent weeks, reversing purchases of 144 million barrels in the two weeks before that, a period that included the attack on Saudi oil installations.
If the attacks on oil processing facilities had a relatively modest and fleeting impact on oil prices and positions, it was entirely unwound in just a fortnight.
In the most recent week, portfolio managers sold NYMEX and ICE WTI (-64 million barrels), Brent (-17 million), US gasoline (-6 million), US heating oil (-5 million) and European gasoil (-4 million).
Fund selling in NYMEX and ICE WTI was the highest in any one-week for more than two years, as managers abandoned expectations of a sustained post-attack spike in prices.
After the sales, funds held a net long position across all six contracts amounting to 532 million barrels, essentially back to their position at the end of August and the start of September.
If relatively passive structural long positions in crude are stripped out, the fund community’s dynamic net long position was just 41 million barrels, not much different from 8 million at the beginning of September.
Concerns about the prospects for oil consumption are dominating the market rather than fears about output disruptions.
Traders are becoming more pessimistic about the prospects for an early truce in the trade conflict between China and the United States – with mounting fears continued skirmishing will push both economies into recession.
Political tensions look set to remain high throughout the remainder of 2019 and 2020 as the United States enters a bitter impeachment investigation and then a presidential election campaign.
At the same time, global motor manufacturers are reporting weakening production and sales, depressing both global economic growth and oil consumption.
The major central banks have reduced interest rates to low levels, which could limit their ability to provide more stimulus in the short term.
And the credit and leverage cycle is already far advanced, with corporations, especially those owned by private equity and in emerging markets, carrying a heavy debt burden.
Growth across the advanced economies and fast-growing emerging markets have decelerated and there is increasing anxiety it could mark the end of the current expansion rather than merely a mid-cycle slowdown.
John Kemp is a Reuters market analyst specialising in oil and energy. Before joining Reuters in 2008, he was an analyst for Sempra Commodities, now part of JP Morgan and Mercuria. He holds a degree in Philosophy, Politics and Economics from the University of Oxford.