Despite a modest increase in bullish positions last week, portfolio managers have significantly reduced their long positions in oil futures over the past two months. This adjustment stems from concerns about decreasing demand and increasing supply.
For the week ending August 27, hedge funds and commodity trading advisors purchased the equivalent of 32 million barrels in the six most traded crude and petroleum futures. This follows a net sale of 48 million barrels in the previous week, according to data compiled by energy analyst John Kemp.
Continued Bearish Outlook
However, this recent buying has done little to counter the substantial reduction in bullish bets on oil futures, which have more than halved since early July. Traders remain pessimistic about oil due to worries about global demand, particularly from China, the world’s largest crude oil importer. The potential for increased supply from OPEC+ has also dampened market sentiment. Despite this, OPEC+ has decided to postpone any output increases for at least another two months.
Market participants fear that additional barrels will not be absorbed due to weaker-than-expected demand and rising supply from non-OPEC+ countries, including the U.S., Canada, Brazil, and Guyana.
Recent Developments in Crude Markets
In the week ending August 27, hedge funds and other managers increased their long positions in Brent Crude, driven by disruptions in Libya’s oil production due to a political conflict between rival governments. As a result, the net long position—which represents the difference between bullish and bearish bets—rose by 31% to 81,000 lots for the week. Meanwhile, interest in the U.S. benchmark, WTI, remained relatively low. Ole Hansen, Head of Commodity Strategy at Saxo Bank, noted in his commentary that the combined net long position of 267,000 lots “remains near the bottom of the long-term range due to relatively weak price action.” Hansen attributed this to skepticism about crude oil’s upside potential amid increasing OPEC+ production and sluggish demand from China.
The bearish stance of hedge funds indicates that there is room to reduce short positions and increase long positions. However, since August 27, further bearish news and data have continued to weigh on market sentiment and oil prices.
Impact of Potential Fed Rate Cuts
Even with the possibility of the Federal Reserve easing monetary policy later this month, oil market participants are concerned about weaker global oil demand during the peak summer season and the lack of additional stimulus from China to boost its economy and oil consumption.
A bullish end-of-summer demand report and a decline in global commercial inventories in the coming weeks will be crucial for lifting oil prices and fostering a more optimistic outlook among traders.