Hedge Funds Rebuild Oil Position after OPEC+ Round Trip: Kemp

Portfolio investors have rebuilt their position in crude oil after reassurance from Saudi Arabia and its OPEC⁺ allies that any planned future increases in production would be contingent on market conditions.

Last week hedge funds and other money managers turned their attention to boosting Brent positions, after a large jump in NYMEX and ICE WTI the week before, according to records filed with exchanges and regulators.

Fund managers purchased the equivalent of 69 million barrels of futures and options linked to Brent over the seven days ending on June 18, the fourth fastest increase for any week since 2013.

Rapid Brent buying came after fund managers purchased 42 million barrels of NYMEX and ICE WTI, as well as 26 million barrels of Brent, the previous week.

Chartbook: Oil and gas positions

As a result, positions and prices have reverted to where they were before OPEC⁺ announced on June 2 it would increase production from the start of the fourth quarter of 2024, subject to market conditions.

Total Brent and WTI positions amounted to 300 million barrels on June 18 up from an immediate post-announcement low of 164 million on June 4 but barely changed from 319 million on May 28.

Fund managers are pessimistic about the outlook for prices in the short term, with the net position in only the 13th percentile for all weeks since 2013.

But expectations OPEC⁺ was about to flood the market with extra barrels have been allayed after official briefings emphasizing the contingent nature of the planned production increases.

Futures prices have also reverted to the same level as before the production increases were announced, with the front-month contract closing at US$85 per barrel on June 18 compared with US$84 on May 28.

The round trip in positions and prices triggered by the OPEC⁺ surprise announcement appeared to have been completed by the middle of last week.

EUROPE GAS OIL

Fund managers also purchased the equivalent of 28 million barrels of futures and options linked to European gas oil over the seven days ending on June 18, a record for the last decade.

The net position doubled to 60 million barrels (67th percentile) from 31 million barrels (36th percentile) the week before.

The sudden bullishness likely explains why commodity trader Trafigura has loaded gas oil in the Persian Gulf onto a very large crude carrier (VLCC) to carry it west to Europe.

The shipment marks the first VLCC to move diesel in bulk from the Middle East to the West in nearly a year, data from Kpler show (“Trafigura charters supertanker to load gasoil from Mideast”, Reuters, June 24).

U.S. NATURAL GAS

Portfolio managers continued to increase their bullish position in U.S. gas but at a slower rate than in recent weeks as inventories proved stubbornly high and the price rally ran out of momentum.

Hedge funds and other money managers purchased the equivalent of 47 billion cubic feet (Bscf) in the two main futures and options contracts linked to the price of gas at Henry Hub in Louisiana.

Funds have increased their position in 14 of the most recent 17 weeks by a total of 2,845 Bscf since February 20, but last week’s increase was one of the smaller increments.

The resulting net long position of 1,170 Bscf (58th percentile for all weeks since 2010) on June 18 was up from a net short of 1,675 Bscf in the middle of February (3rd percentile).

Working gas inventories were 592 Bscf above the prior ten-year seasonal average on June 14 down from a surplus of 664 Bscf on March 15.

In percentage terms, inventories were 24% above the ten-year seasonal average down from a surplus of 40% some 13 weeks earlier.

But stocks were still 1.47 standard deviations higher than average and on that measure the surplus had not narrowed at all.

Persistently high inventories have begun to test investors’ faith in a rapid reversion to normal after major gas producers announced cuts to drilling programs in February.