Oil market sees frenzy of hedge fund buying

LONDON: Investors have purchased oil at the fastest rate for more than four years, amid optimism that Saudi Arabia and its OPEC+ allies will continue to restrict production while an improving economic outlook boosts consumption.

Ukraine’s drone attacks on oil refineries and export terminals in Russia, which threaten to disrupt production and exports of both crude and fuels, have turbocharged the shift in sentiment to more bullishness.

Over the seven days ending on March 19, hedge funds and other money managers purchased the equivalent of 140 million barrels in the six most important futures and options contracts linked to petroleum prices.

The buying was the fastest since December 2019, and among the ten fastest weeks since records began in 2013, according to position reports filed with exchanges and regulators.

There were purchases almost across the board in NYMEX and ICE WTI (+57 million barrels), Brent (+55 million), European gas oil (+18 million) and U.S. gasoline (+10 million) but no change in U.S. diesel.

In a sign of how bullish investors were becoming, most buying came from the creation of new long positions (+111 million barrels) with only a moderate amount of short covering (-30 million).

The combined position across all six contracts had increased to 641 million barrels (61st percentile for all weeks since 2013), the highest for six months, and up from just 207 million (1st percentile) in the middle of December.

Fund managers had become moderately bullish or at least neutral towards the entire petroleum complex for the first time in months.

Inflation-adjusted crude oil prices were almost exactly in line with the long-term average since the start of the century.

But many fund managers now expect production restraint and strong consumption will lift them into the upper half of the historic range in the next few months.

In contrast to oil, portfolio investors remained bearish about U.S. gas, even though gas prices are close to their lowest level in real terms for more 30 years.

Fund managers purchased the equivalent of 113 billion cubic feet (bcf) in the two major futures and options contracts linked to the price of gas at Henry Hub in Louisiana.

Even so, the fund community still had a net short position of 449 bcf (20th percentile for all weeks since 2010) on March 19.

Managers were more bearish about the outlook than a year ago, when they held a net long position of 75 bcf (35th percentile).

Several major producers have already announced cuts to drilling and production that should eventually eliminate the excess inventories.

El Nino conditions in the Pacific are also fading, which means winter 2024/25 is likely to be significantly colder than winter 2023/24.

In the meantime, however, the run of mild weather has continued and the market is still struggling to bring inventories under control.

Inventories had ballooned to 662 bcf (40 percent or +1.47 standard deviations) above the prior ten-year seasonal average on March 15, up from a surplus of just 64 bcf (2 percent or +0.24 standard deviations) on Oct. 1.

Meanwhile, oil prices were little changed on Tuesday as investors took a more mixed view toward the loss of Russian refinery capacity after recent Ukrainian attacks while a slightly weaker U.S. dollar offered some support.

Front-month Brent crude futures due to expire on Thursday were 12 cents down at $86.63 abarrel by 1559 GMT while U.S. West Texas Intermediate (WTI) crude futures was up 13 cents at $82.08.

The more actively traded Brent futures for June were down 12 cents at $85.96. Brent rose 1.5 percent on Monday while WTI gained 1.6 percent after Russia's government ordered companies to cut output in the second quarter to meet a 9 million barrels per day (bpd) target to comply with pledges to the OPEC+ consumer group.

Russia, among the top three global oil producers and one of the largest exporters of oil products, is also contending with a spate of recent attacks on its oil refineries by Ukraine and has mounted its own attacks on Ukrainian energy infrastructure.

Russian oil refining capacity shut down by Ukrainian attacks has reached 14% of the country's total capacity, Reuters calculations showed on Tuesday.

"Gasoline is seeing the support of reduced availability to the global market from curtailed Russian exports that has filtered through to the U.S.," said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Illinois.

FGE analysts expect a structural decline in Russian refinery runs and do not see them regaining 2023 levels even in the second half of this year, they wrote in a note. A slightly weaker U.S. dollar offered some support to oil prices. A weaker dollar typically makes oil cheaper for oil buyers holding other currencies.