Hedge funds sold petroleum last week as the rising number of coronavirus cases in the United States and Europe fuelled fears of a double-dip recession hitting oil consumption.
Hedge funds and other money managers sold the equivalent of 53 million barrels in the six most important petroleum futures and options contracts in the week to Oct. 27.
Last week’s sales essentially canceled out the previous week’s purchases and were the heaviest selling since the first week of September, according to position records published by regulators and exchanges.
Fund managers were small buyers of Brent (+4 million barrels) but otherwise sold NYMEX and ICE WTI (-37 million), U.S. gasoline (-8 million), U.S. diesel (-6 million), and European gasoil (-7 million).
Most of the adjustments came on the short side of the market, where portfolio managers established 48 million barrels of new short positions, suggesting bearish sentiment rather than profit-taking.
Investors seem convinced that the OPEC+ group of producers will postpone output increases scheduled for January in an effort to keep the crude market close to balance.
But the wave of new lockdowns spreading across Europe, and possibly in the future to the United States, is expected to hit the consumption of refined products.
Funds’ net position in crude has fallen to the 38th percentile for all weeks since the start of 2013, indicating managers expect inventories to remain relatively high.
But the net position in refined products has fallen even further, to the 21st percentile, anticipating serious overproduction downstream.
Brent and Gasoil calendar spreads are also pointing to a market expected to remain oversupplied in the next few months.
As the economic outlook deteriorates, refiners will restrain crude processing more deeply and for longer, which will in turn force OPEC+ to extend current production limits.
If that is not enough to rebalance the petroleum market, crude prices will have to retreat to choke off the nascent recovery in U.S. oil drilling.