Traders are becoming more pessimistic about oil prices due to increasing global oil supply and weaker-than-expected demand.
In the week ending September 3, hedge funds and other investors significantly increased their selling of the most traded petroleum futures contracts. Portfolio managers reduced their overall net long position—the difference between bullish and bearish bets—to the lowest level since data collection began in 2011. This indicates a major shift towards bearish sentiment.
The bearish trend had already begun in the previous week ending August 27, with traders reducing their bullish bets by more than half since early July. During the week ending September 3, selling intensified, causing oil prices to fall to their lowest point this year. Concerns about the potential return of Libyan oil exports, combined with weak Chinese economic data and lowered growth forecasts, have dampened market sentiment.
Data from Bloomberg reveals that the combined net long position for Brent and WTI crude oil benchmarks dropped by 99,889 lots to 139,242 lots by September 3. This marks the lowest bullish positioning recorded since data collection began in March 2011. Specifically, the net long position for U.S. benchmark WTI Crude fell by 62,000 lots to 125,000 lots, while Brent Crude’s net long position was nearly halved to around 42,000 lots.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, noted that the net long position, including three fuel products, dropped to 121,000 contracts, the lowest since ICE began tracking in 2011.
Concerns about slowing economies in China and the U.S., coupled with fears of oversupply from an OPEC+ production increase, have driven this bearish trend. Despite OPEC+ deciding to delay the planned output rise from October to December, this decision did little to improve market sentiment, and prices continued to fall.
Last week, WTI Crude experienced its worst weekly performance since October 2023, dropping 8%. By Friday, WTI and Brent settled at their lowest levels since June 2023, at $67.67 and $71.06 per barrel, respectively.
On Monday morning, prices rebounded by 1% following last week’s decline, partly due to forecasts of a potential hurricane in the Gulf of Mexico. However, this rebound is overshadowed by ongoing concerns about the U.S. and Chinese economies.
Weak U.S. jobs data on Friday, showing fewer jobs created than expected, renewed fears of a recession. However, this data also raises the possibility of the Federal Reserve cutting interest rates next week, which could potentially boost oil demand if economic growth picks up.
Yet, persistent weak Chinese economic data continues to pressure commodity prices. Major Wall Street banks, including Goldman Sachs, JP Morgan, Citi, and Bank of America, have lowered their forecasts for China’s GDP growth below the official target of “about 5%” for this year. Bank of America recently revised its estimate to 4.8% from 5%, citing less accommodative fiscal and monetary policies as insufficient to revive domestic demand growth.
An improvement in Chinese demand and a rebound in the U.S. economy following anticipated Fed rate cuts would be crucial in reversing the current bearish sentiment in the oil market.