Oil

COLUMN-Oil prices stall after funds complete short covering: Kemp

Credit: REUTERS/THOMAS WHITE

By John Kemp

LONDON, March 11 (Reuters) - Benchmark oil prices appear to have topped out for the time being after investors finished repurchasing previous bearish short positions in U.S. crude futures and options.

Repurchases had fuelled the rally for almost three months as the outlook for consumption improved and Saudi Arabia and its OPEC⁺ allies restricted production.

In the premier NYMEX WTI contract, hedge funds and other money managers repurchased 12 million barrels of short positions over the seven days ending on March 5.

Outstanding shorts were reduced to just 28 million barrels down from a high of 128 million barrels on December 12.

Chartbook: Oil and gas positions

Based on minimum short positions over the last ten years, funds probably have fewer than 10 million barrels left to buy back.

But massive short covering has lifted front-month WTI prices by less than $11 per barrel in the last three months. In real terms, prices are almost exactly in line with the inflation-adjusted average since the start of the century.

Almost all shorts have now been repurchased, so extending the rally will rely on the establishment of new bullish longs. But funds actually liquidated 3 million barrels of long positions over the seven days ending on March 5.

With no new buying coming into the market, the upward momentum behind oil prices petered out.

REFINED FUELS

Investment managers sold refined fuels (-13 million barrels) in the most recent week, mostly middle distillates (-12 million), split between U.S. diesel (-7 million) and European gas oil (-5 million).

Previously, funds had been bullish about the outlook for distillates, which are sensitive to the business cycle, amassing a position of 87 million barrels (72nd percentile for all weeks since 2013) by the middle of February.

But they have sold 27 million barrels over the three most recent weeks, trimming the position to just 60 million barrels (50th percentile) on March 5.

Sales of diesel and gas oil futures have taken much of the heat out of refining margins and reversed some of the earlier rise in wholesale prices.

Manufacturers in the United States, Europe and Asia are recovering from the cyclical slowdown in 2022/23 much more slowly than anticipated at the start of the year.

Meanwhile, the market has adapted to the disruption of diesel shipments from the Middle East and Asia to Europe via the Gulf of Aden and the Red Sea.

U.S. NATURAL GAS

Portfolio investors scaled back bearish short positions in U.S. gas following announcements of drilling and output cuts from a number of major producers in the United States.

Hedge funds and other money managers purchased the equivalent of 571 billion cubic feet (bcf) of futures and options in the two major contracts linked to the price of gas at Henry Hub in Louisiana.

Previous bearish short positions were reduced by 361 bcf, while 210 bcf of new bullish longs were initiated, according to records filed with the U.S. Commodity Futures Trading Commission.

Funds have purchased a total of 1,079 bcf in the last two weeks, offsetting about half the 2,085 bcf sold over the previous five weeks.

As a result, the combined position had been boosted to a net short of 595 bcf (16th percentile) up from a net short of 1,675 bcf (3rd percentile) on February 20.

In real terms, prices had fallen to their lowest for more than three decades in late February, and with so many short positions to be repurchased, the balance of risks had swung firmly to the upside.

Production cuts announced by several of the largest onshore gas producers triggered a short covering rally, but so far it has lifted prices only marginally.

U.S. gas inventories were at the highest level for eight years at the start of March, according to data from the U.S. Energy Information Administration.

Inventories were 529 bcf (+29% or +1.31 standard deviations) above the prior ten-year seasonal average and the surplus had swelled from 64 bcf (+2% or +0.24 standard deviations) on October 1.

Drilling cuts should eventually force inventories back to more normal levels but the rebalancing process will take time.

Many fund managers are wary about becoming bullish after calling the turning point too early three times already in the last 12 months.

Related columns:

- Oil prices rise as funds scale back bearish positions (March 4, 2024)

- Record U.S. oil and gas production keeps prices under pressure (March 1, 2024)

- U.S. gas glut gets hedge funds ultra bearish (February 26, 2024)

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

((john.kemp@thomsonreuters.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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