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May 27, 2024
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COLUMN-Oil attracts cautious buying from hedge funds: Kemp

By John Kemp

LONDON, Jan 15 (Reuters) – Portfolio investors purchased
petroleum in the first full week of 2024, reversing sales the
previous week and continuing the pattern of choppy trading that
has continued since early December.

Hedge funds and other money managers bought the equivalent
of 54 million barrels in the six most important petroleum
futures and options contracts over the seven days ending on Jan.

Purchases largely reversed sales of 66 million barrels the
previous week, according to records filed with ICE Futures
Europe and the U.S. Commodity Futures Trading Commission.

In the most recent week, purchases focused on crude (+55
million barrels) reversing the previous week’s crude-dominated
sales (-63 million).

There were only minor adjustments in U.S. gasoline (+7
million barrels), U.S. diesel (-7 million) and European gas oil
(no change).

Chartbook: Oil and gas positions

Despite some position volatility, the basic picture has
remained the same since early December.

Fund managers have been strongly bullish on refined fuels in
the United States owing to relatively low inventories and
healthy outlook for the economy and fuel consumption.

Funds have been neutral about Brent with plentiful
inventories and new sources of supply offset by OPEC+ production
cuts and the threat of disruption to export routes from conflict
in the Red Sea.

But the hedge fund community has been outright bearish about
WTI with plentiful crude inventories in the United States and
persistent growth in production from shale producers.

There was some short-covering in the premier NYMEX WTI
contract with short positions reduced by 20 million barrels in
the most recent week. But remaining short positions are still
elevated at 101 million barrels.

From a positioning perspective, there is a significant risk
that further short-covering will fuel a sharp rally in WTI

Yet most managers are convinced the fundamentals remain poor
with production set to outstrip consumption ensuring prices fall


Investors are becoming less bearish about the outlook for
gas prices in the United States as production growth slows.

Hedge funds and other money managers purchased the
equivalent of 369 billion cubic feet (bcf) of gas in the two
major futures and options contracts over the seven days ending
on Jan. 9.

Funds have bought a total of 1,078 bcf over the most recent
four weeks, which was the fastest rate of buying since the
middle of 2021.

In consequence, funds had built a net long position of 80
bcf (35th percentile for all weeks since 2010) by Jan. 9 up from
a net short of 999 bcf (8th percentile) on Dec. 12.

Working gas inventories were still 320 bcf (+11% or +1.21
standard deviations) above the prior 10-year seasonal average on
Jan. 5, the highest for the time of year since 2016.

The surplus had swelled from 60 bcf (+2% or +0.23 standard
deviations) near the start of the winter season on Oct. 6.

But production growth had slowed to less than 3% per year by
August-October 2023 from more than 6% a year earlier.

Production gains have slowed in response to the sharp fall
in prices since mid-2022 and the slowdown is set to deepen into
early 2024.

Front-month futures prices have averaged just below $3 per
million British thermal units so far in January 2024, which puts
them in only the 10th percentile for all months since the start
of the century, after adjusting for inflation.

With prices already low and production growth slowing, fund
managers are becoming much less bearish on gas prices, even if
outright bullishness remains rare at this point.

Related columns:

– U.S. oil and gas production growth starts to decelerate
(January 10, 2024)

– Oil prices hit by resumed hedge fund short selling
(January 8, 2024)

John Kemp is a Reuters market analyst. The views expressed are
his own. Follow his commentary on X https://twitter.com/JKempEnergy

(Editing by Tomasz Janowski)


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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