US oil futures draw renewed interest from hedge funds

Portfolio investors bought oil contracts for the first time in seven weeks as traders piled up short positions ahead of OPEC⁺ ministers meeting to decide production policy in the second half of 2024.

Hedge funds and other money managers bought the equivalent of 21 million barrels in the top six futures and options contracts in the seven days ended May 28.

The purchases were the first after six weeks of sales totaling 304 million barrels since April 9, according to records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

Most of the buying came from closing out previous bearish short positions (+16 million barrels) rather than creating new bullish long positions (+6 million).

Even after short covering, the combined position was just 402 million barrels (19th percentile for all weeks since 2013), while bullish longs outnumbered bear shorts 2.51:1 ( 24th percentile).

Fund managers remained skeptical about the likelihood of a price hike, even as prices neared their long-term average and OPEC⁺ ministers signaled they would extend production curbs (granted five days later).

In the most recent week, buying was heavily concentrated in NYMEX and ICE WTI (+32 million barrels), with small purchases in Brent (+2 million) and US diesel (+2 million).

There were sales in both US gasoline (-5 million barrels) and European diesel (-9 million).

Fund managers continued to move away from the international benchmark Brent crude and towards the regional benchmark US WTI.

Funds have bought 89 million barrels of WTI over the past three weeks, while selling 173 million barrels of Brent over the past four.

Part of this rotation reflected the evaporation of Brent’s previous war risk premium as the conflict between Israel, Iran, Hamas, Hezbollah and the Houthis took hold.

But the uptick in optimism around WTI could also be an indication of an impending squeeze on deliverables around the Cushing contract delivery location in Oklahoma.

Commercial crude inventories at Cushing fell by nearly 2 million barrels in the seven days ended May 24, the biggest draw in 17 weeks.

Cushing stocks were 11 million barrels (-25% or -0.76 standard deviations) below the previous 10-year seasonal average.

Even a few weeks of drawdowns could leave deliverable supplies extremely low and make the contract vulnerable to further tightening.

US natural gas
Fund managers have become increasingly bullish on the outlook for US gas prices, anticipating that strong demand from gas-fired generators and the restart of LNG export facilities will remove excess inventories.

Funds bought the equivalent of 316 billion cubic feet (bcf) in the two major price-linked contracts at Louisiana’s Henry Hub in the seven days ended May 28.

Funds have been net buyers in five of the past six weeks, buying a total of 1,365 bcf since April 16.

The fund community held a net long position of 881 bcf (53rd percentile for all weeks since 2010) up from a net short position of 1,675 bcf (3rd percentile) in mid-February and the most bullish position since end of October 2023.

US operating gas inventories were still 616 bcf (+28% or +1.43 standard deviations) above their 10-year average as of May 24.

But the surplus has been broadly stable or even narrowed slightly since mid-March, meaning production, consumption and exports are now close to balance after large surpluses in 2023 and early 2024.

If production starts to decline following drilling cuts announced in February, or if consumption rises faster, legacy stocks are likely to run out over the next nine months, which has started to draw funds back into the market.

(Reuters – Writing by John Kemp, a Reuters market analyst. Opinions expressed are his own. Editing by Susan Fenton)