London, November 14 (Reuters) – Last week witnessed a continued sell-off of petroleum futures and options, marking the most bearish sentiment since mid-year, predating Saudi Arabia and its OPEC⁺ partners’ decision to remove excess crude from the market.
Over the seven days ending on November 7, hedge funds and other money managers divested the equivalent of 57 million barrels across the six most critical futures and options contracts. This trend continues a pattern seen in five of the last six weeks, culminating in a reduction of their combined position by 331 million barrels since September 19.
The combined position now stands at 349 million barrels, representing the 13th percentile for all weeks since 2013, a notable decline from the six-week high of 680 million barrels (64th percentile). This downturn in sentiment mirrors the reversal of the bullish outlook prevalent in the market during the third quarter.
Crucially, fund sales last week were predominantly concentrated in crude, with a significant reduction of 52 million barrels, evenly split between NYMEX and ICE WTI (-28 million) and Brent (-24 million). Notably, the position in WTI has become notably bearish, with the combined NYMEX and ICE WTI position shrinking to just 90 million barrels (4th percentile) from 286 million (60th percentile) at the end of September.
This shift coincided with the stabilization of crude inventories at the NYMEX delivery point in Cushing, Oklahoma, and a moderation of the extreme backwardation in nearby calendar spreads. The sharp movement in these spreads indicates a resolution to the supply squeeze, prompting fund managers to adopt a more bearish stance on WTI prices.
Bearish short positions in the NYMEX WTI contract surged to 96 million barrels on November 7 from a modest 20 million at the beginning of October. While still outnumbered by bullish long positions, the increased concentration of short positions raises the likelihood of a sharp reversal in the previous downward price trend.
Concerns persist about the potential for OPEC⁺ to take further actions to drive prices higher or initiate a renewed squeeze on deliverable inventories at Cushing. Many traders anticipate an extension of current production cuts by Saudi Arabia, Russia, and their OPEC⁺ allies until at least the end of March.
Challenges in U.S. Natural Gas Market Persist Amidst Record Production and Mild Weather
Portfolio investors are grappling with a bearish outlook for U.S. gas prices, facing record production and a mild start to the winter heating season. Over the seven days ending on November 7, hedge funds and money managers sold the equivalent of 380 billion cubic feet (bcf).
Since July, these investors have struggled to maintain a bullish stance, repeatedly retreating in the face of persistently high inventories. The net position on November 7, standing at 563 bcf (45th percentile), is not significantly different from the position of 743 bcf (48th percentile) on July 11.
Front-month futures prices, while low in real terms, suggest an upside risk. However, the accumulation of a bullish long position by fund managers has consistently clashed with high production and mild weather, leaving inventories above the seasonal average.