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LONDON, Hedge fund managers show little directional conviction on petroleum prices after crude futures doubled between late April and early June, suggesting most now see upside and downside risks as finely balanced.
For the second week running, fund managers made no significant changes in their positioning in any of the six most import futures and options contracts, according to records published by regulators and exchanges.
Funds purchased the equivalent of just 10 million barrels in the seven days ending on June 9, after buying 6 million a week earlier, compared with average purchases of 40 million per week over the previous eight weeks.
Funds were small buyers of Brent (+12 million barrels) but there were no significant changes in NYMEX and ICE WTI (unchanged), U.S. gasoline (-3 million), U.S. diesel (-1 million) or European gasoil (+1 million).
Oil prices have come a long way since the trough in early April as Saudi Arabia, Russia and their allies in the enlarged OPEC+ group of oil exporters, as well as U.S. shale players, reduced production.
At the same time, consumption has rebounded from very low levels for some fuels and in some countries, as stay-at-home orders and lockdowns are eased and some businesses and transport systems reopen.
But the strong fund-buying wave which helped accelerate the rise in crude futures prices in late April through May and into the first week of June has faded, leaving the market vulnerable to a pullback.
From both a fundamental and positioning perspective, upside and downside risks now appear evenly balanced for both crude and fuels.Production cuts should drain excess oil inventories over the remainder of 2020/21. Physical markets already show signs of an impending supply deficit. But the drawdown will be gradual.
If prices rise too far too fast, there is a risk of a resurgence in U.S. shale production, at least in the short term, from the completion and reopening of already-drilled wells.
Higher prices also threaten to undermine adherence to the production pact among the members of OPEC+ and to reopen old disputes about the trade-off between prices and market share.
On the consumption side, fuel use has recovered substantially, and the improvement is expected to continue, but it could still leave demand below pre-epidemic levels throughout the rest of this year and into next.
Bond, equity and oil markets remain concerned about the possibility of a second wave of coronavirus infections later this year, when winter arrives in the northern hemisphere, as well as a lingering post-epidemic recession.
From a positioning perspective, fund managers currently hold just under 4 bullish long positions for every short position in the six petroleum contracts, which is very close to the average over the last seven years.
The long/short ratio in crude (6:1) is slightly above average while the ratios for both gasoline (2:1) and middle distillates (1:1) are significantly below.Positioning risks are arguably neutral for crude, especially U.S West Texas Intermediate (WTI), while there is room for position-building to drive price appreciation and stronger margins in refined fuels.
But with fuel stocks still well above their long-term averages, and still rising in the case of distillates, the price and margin upturn is likely to be delayed.For now, most hedge fund managers are staying on the sidelines, waiting for stronger signs of a cyclical recovery in consumption.