Hedge funds have never been so pessimistic about the oil market

Hedge funds and other asset managers they have never been more pessimistic on the outlook for oil prices as signs mount that major industrial economies are losing steam, according to energy analyst John Kemp. Investors also concluded that Saudi Arabia and its OPEC+ allies have run out of options and either cannot or will not cut their own production further to offset slowing consumption growth and falling prices.

Hedge funds and other money managers sold the equivalent of 128 million barrels in the top six futures and options contracts of the seven days ending September 10. Fund managers have sold oil in eight of the past ten weeks, reducing their combined position by a total of 558 million barrels since the start of July.

And for the first time on record, funds held a net short position of 34 million barrels, down from a net long position of 524 million barrels on July 2.

The most recent week saw strong selling across the board, led by Brent (-54 million barrels) but including NYMEX and ICE WTI (-27 million), European diesel (-20 million), US diesel ( -15 million) and US Gasoline (-11 million).

Fund managers have sold Brent in seven of the past nine weeks, reducing their position by a total of 213 million barrels since July 9. For the first time on record, funds held a net short position in Brent of 13 million barrels, down from a net long position of 200 million nine weeks earlier.

Fund managers also held a record net short position of 48 million barrels in European diesel and a near-record net short position of 39 million barrels in US diesel.

Even in WTI and gasoline, where sentiment was not as gloomy, positions were only a few million barrels above record lows.

In the NYMEX WTI first contract, fund managers increased short positions by a total of 61 million barrels over the past four weeks.

Bearish oil positions have become very crowded, and the accumulation of short positions creates the conditions for a sharp price rally if and when the news flow becomes less negative.

For now, though, are investors focused on the limited options available to OPEC? to counteract the deterioration of the economic outlook.

Depths of despair

Investors are extraordinarily pessimistic, even as benchmark Brent futures prices have already fallen to their lowest level in real terms since early 2021.

Adjusted for inflation, crude oil prices have retreated to levels last seen when major economies were still in the grip of the coronavirus pandemic and the first successful vaccines had only recently been announced.

Inflation-adjusted Brent prices have averaged $72 a barrel so far in September, placing them in the 35th percentile for all months since the turn of the century, down from a recent high of $90 ( 57th percentile) in April.

Falling prices are sending an increasingly strong signal about the need for a further slowdown in output growth to match the deteriorating macroeconomic environment and worsening outlook for consumption.

From October 2022, Saudi Arabia and OPEC? The partners announced production cuts totaling 5.66 million barrels per day (b/d) to reduce excess inventories and boost prices.

Recently, the group has tried to eliminate some of those cuts, but has been forced to postpone planned production increases due to a slowdown in consumption and a renewed drop in prices.

Investors have concluded that the group has no appetite to cut production further in the short to medium term.

The burden of adjustment must therefore fall on rival producers in the United States, Brazil, Canada and Guyana, which have accounted for almost all of the output growth in recent years.

Prices will fall until they force a further slowdown in drilling and production increases by US shale producers, the most price-sensitive suppliers in the near term.

NATURAL GAS USA

Investors are cautiously building a bullish position in US natural gas as ultra-low prices and record consumption by gas-fired generators diminish excess inventories inherited from the exceptionally mild winter of 2023/24.

Hedge funds bought the equivalent of 192 billion cubic feet (bcf) of the two major futures and options contracts tied to prices at the Henry Hub in Louisiana in the seven days ending Sept. 10.

Funds purchased a total of 290 bcf over the past two weeks, bringing their net long position to 507 bcf (45th percentile for all weeks since 2010), although the position is still well below the recent high of 1,170 bcf (a 60th percentile) at mid-term. June.

Inventories quickly normalized as ultra-low prices encouraged peak consumption by power generators in the latter stages of the summer air-conditioning season.

Working inventories rose by a total of just 188 billion cubic meters in the nine weeks ended Sept. 6, the smallest seasonal build in more than a decade and less than half the average of 441 billion cubic meters from the last ten years.

As a result, in early September, stocks were still high, but returned to the normal range of ± 1 standard deviation from the mean for the first time since early February.

With the main air conditioning season over, inventories will soon begin to rise faster and are likely to still be above average when the main winter heating season begins on November 1st.

But the surplus will be much smaller than a few months ago and prices have started to rise, reflecting the more balanced outlook for winter 2024/25.

By Zerohedge.com

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