Formerly bullish investors dump oil as demand disappoints: Kemp

LONDON, May 13 (Reuters) - Investors sold petroleum futures and options in the most recent week at the fastest rate for a year as the war risk premium continued to evaporate and the anticipated strong recovery in consumption receded.

Hedge funds and other money managers sold the equivalent of 143 million barrels in the six most important petroleum-related derivatives contracts over the seven days ending on May 7.

Fund managers have sold petroleum derivatives in each of the last four weeks reducing their combined position by a total of 265 million barrels since April 9.

The combined position had been reduced to 420 million barrels (21st percentile for all weeks since 2013) from 685 million (66th percentile) four weeks earlier.

Positioning had become strongly bearish from moderately bullish at the start of April, based on reports filed with ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

Chartbook: Oil and gas positions

In the most recent week, there were heavy sales of both Brent (-60 million barrels) and NYMEX and ICE WTI (-57 million) as well as U.S. gasoline (-19 million) and European gas oil (-12 million). The only purchases were in U.S. diesel.

Positioning has become exceptionally bearish towards WTI, with a net holding of just 83 million barrels (5th percentile) and longs outnumbering shorts by a ratio of just 1.60:1 (6th percentile).

Persistent growth in U.S. crude production has ensured inventories remain close to the long-term average and the regional market is well supplied.

By contrast, Brent is neutral, with a net holding of 261 million barrels (57th percentile) and longs outnumbering shorts by 4.21:1 (46th percentile).

The less bearish positioning on Brent likely reflects residual conflict risk in the Middle East and the North Sea markers smaller exposure to over-production in the United States.

It may also reflect a structural shift towards futures and options linked to Brent and away from WTI after WTI grades were included in the Brent price assessments.

At the same time, the fund community has become mildly bearish about the outlook for both European gas oil and U.S. diesel in response to the halting recovery in manufacturing and freight activity.

Biodiesel and other renewable fuel oils are also capturing a small but rapidly increasing share of the freight markets formerly dominated by petroleum-derived diesel.

The anticipated cyclical depletion of inventories has not materialised so far this year; the market remains comfortably supplied with few signs prices will move higher in the short term.

Previous bullishness about U.S. gasoline also vanished, with funds selling a total of 36 million barrels over the last four weeks.

The net position had been cut to just 49 million barrels (41st percentile) from 85 million (88th percentile) four weeks earlier.

U.S. NATURAL GAS

Investors have become progressively less bearish about the outlook for U.S. gas prices despite the massive amount of inventories carried after an exceptionally warm winter in 2023/24.

Hedge funds and other money managers purchased the equivalent of 490 billion cubic feet (bcf) in futures and options linked to gas prices at Henry Hub in Louisiana over the seven days ending on May 7.

Funds purchased gas contracts at the fastest rate for nine weeks since early March in response to indications surplus inventories have stabilised and expectations they will be reduced over the summer.

The overall position was boosted to a net long of 314 bcf (41st percentile since 2010), the highest for almost four months.

Inventories remain 667 bcf (36% or +1.46 standard deviations) above the prior ten-year seasonal average but the surplus has been basically stable for the last two months after increasing relentlessly for most of the winter.

Related columns:

- Renewable fuels take bite out of U.S. diesel consumption (May 10, 2024)

- U.S. gas surplus will be eliminated by the end of winter 2024/25 (May 8, 2024)

- Fund negative towards U.S. crude and fuels amid ample stocks (May 7, 2024)

- OPEC likely to extend production cuts in June

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