(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chartbook: tmsnrt.rs/2Bfloe4
By John Kemp
LONDON, Feb 4 (Reuters) - Hedge funds are becoming steadily less bearish towards oil as OPEC output cuts and U.S. sanctions on Venezuela remove large volumes of crude from the market amid increasing confidence a global recession can be averted.
Hedge funds and other money managers were net buyers of another 30 million barrels of Brent crude futures and options in the week to Jan. 29, according to position data from ICE Futures Europe.
Fund managers have been net buyers in seven of the last eight weeks and have increased their position by 96 million barrels since Dec. 4 (tmsnrt.rs/2Bfloe4).
In common with previous weeks, fund managers mostly closed out old bearish short positions (-18 million barrels) rather than opening new bullish long ones (+12 million).
Bearish short positions have fallen by more than 60 percent from a peak of 122 million barrels on Dec. 11 to 48 million as fund managers have become convinced that the fourth-quarter sell-off is over.
In contrast, bullish long positions have risen by just 27 million barrels over the same period, as portfolio managers remain cautious. However, weekly increases have started to accelerate, in a sign of growing confidence.
Funds now hold almost 6 bullish long positions for every bearish short one, up from a ratio of 2:1 in mid-December, and the most bullish overall position since mid-October.
OPEC’s early and aggressive output reductions have removed some of the downside supply risk to oil prices even as traders remain uncertain about the risk of recession and the potential hit to consumption growth in 2019.
U.S. sanctions on Venezuela’s national oil company PDVSA, since broadened to include third-country purchasers of Venezuela’s heavy crude, are also likely to reduce global oil supplies.
Besides crude, fund managers were buyers of 7 million barrels of European gasoil futures and options in the week to Jan. 29, according to exchange data.
Net long positions in gasoil have risen in each of the last four weeks and now stand at 22 million barrels, up from just 2 million barrels at the end of 2018.
Gasoil is the part of the barrel most closely geared to the business cycle, so cautious buying suggests fund managers see a reduced probability of recession this year.
- Hedge funds return to oil as OPEC removes some downside risk (Reuters, Jan. 28)
- Hedge funds buy oil amid greater optimism on economy (Reuters, Jan. 21)
- Fund managers neutral on crude and fuel outlook (Reuters, Jan. 14)
- Hedge funds dump crude and diesel as economic outlook darkens (Reuters, Jan. 8) (Editing by Dale Hudson)