(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chartbook: tmsnrt.rs/2WHH9PE
By John Kemp
LONDON, June 3 (Reuters) - Hedge fund managers have stepped up their sales of crude oil and refined fuels amid growing concerns about the outlook for the world economy and oil consumption.
Hedge funds and other money managers sold 122 million barrels in the six major petroleum futures and options contracts during the week to May 28, the heaviest one-week selling since October 2018.
Fund managers sold Brent (41 million barrels), NYMEX and ICE West Texas Intermediate (38 million barrels), U.S. gasoline (11 million barrels), U.S. heating oil (12 million barrels) and European gasoil (20 million barrels).
Funds have now sold 186 million barrels of petroleum futures and options over the five weeks since April 23, after buying 609 million barrels over the previous 15 weeks since Jan. 8.
In retrospect, April 23 proved to be an important turning point when funds switched from accumulating bullish long positions and initiated a new cycle of short sales.
In its early stages, the shift from accumulation to liquidation was probably driven mostly by concerns the market had become overstretched and was due a correction (tmsnrt.rs/2WHH9PE).
By April 23, hedge fund managers held almost nine bullish long positions for every bearish short one, up from a ratio of less than 2:1 at the start of the year.
In recent years, large concentrations of long or short positions have usually presaged a reversal in the price trend, and hedge fund positions had become very lopsided by April.
More recently, however, the pace of short-selling has accelerated as portfolio managers became more concerned about a possible slowdown in the global economy and oil consumption growth.
Liquidation of previous long positions has now been joined by the initiation of fresh shorts as portfolio managers anticipate a deeper pullback in prices.
Fund positions and oil prices have been hit by the same wave of negative sentiment about the economy that has hammered equity markets around the world and caused safe-haven bond markets to rally since the start of May.
Intensifying concerns about the global economy have outweighed fears about supply disruptions caused by U.S. sanctions on Iran and Venezuela and the contamination of a Russian export pipeline.
Given how far global equity markets fell in the second half of last week, it is likely fund managers have continued to sell crude and products since May 28.
Following the sell-off, hedge funds’ overall long position in the six major contracts had been reduced to 725 million barrels on May 28.
Net length is down from 911 million barrels on April 23 but still more than double the recent low of 302 million barrels on Jan. 8.
And hedge fund long positions still outnumbered short positions by a ratio of 5:1, more than double the 2:1 at the start of the year.
From a fundamental perspective, the oil market is precariously balanced between a relatively bullish supply scenario and a bearish demand outlook.
From a positioning perspective, some but not all the downside risk has been reduced by the sale of excess bullish positions.
- Hedge funds bang defensive drum on oil (Reuters, May 28)
- Funds sell oil as economic fears trump supply threats (Reuters, May 20)
- Oil prices trapped by grim news from emerging markets (Reuters, May 15)
- Oil prices stumble as hedge funds become overextended (Reuters, April 29) (Editing by Dale Hudson)