By John Kemp
LONDON, (Reuters) – Investors abandoned many of their remaining bullish petroleum positions last week amid growing concerns about lacklustre consumption and a worsening outlook for the global economy.
Hedge funds and other money managers sold the equivalent of 117 million barrels in the six most important futures and options contracts over the seven days ending on July 30.
Fund managers had sold petroleum in each of the most recent four weeks, cutting their net position by a total of 262 million barrels since the start of July.
The most recent week saw sales in Brent (-68 million barrels), NYMEX and ICE WTI (-31 million), U.S. gasoline (-9 million) and European gas oil (-9 million) though essentially no change in U.S. diesel.
The combined position had been halved to just 262 million barrels (4th percentile for all weeks since 2013) from 524 million barrels (40th percentile) on July 2.
Fund positions had become very bearish across Brent (3rd percentile), U.S. gasoline (5th percentile), U.S. diesel (14th percentile) and European gas oil (16th percentile).
There was slightly less bearishness towards WTI (28th percentile), based on low stocks around the NYMEX delivery point at Cushing and potential for a squeeze.
Bearishness across the complex rather than isolated contracts indicates traders are anticipating weaker global consumption as the major economies lose momentum.
Recent manufacturing surveys from the United States, the eurozone and China have all shown activity stalling in the second and third quarters after a brief rebound at the start of the year.
The expected depletion of global petroleum inventories has been pushed back multiple times this year; now it looks like it has been deferred again.
As a result, front-month Brent futures contracts have slumped below $76 per barrel, the lowest since the turn of the year, and below the long-run inflation adjusted average.
U.S. NATURAL GAS
Investors made few changes to their basically neutral view on the outlook for gas prices in the United States as inventories remained well above average despite ultra-low prices and record gas-fired power generation.
Hedge funds and other money managers purchased the equivalent of 30 billion cubic feet (bcf) of futures and options linked to the price of gas at Henry Hub in Louisiana over the seven days ending on July 30.
Fund managers have purchased a total of 182 bcf in the two most recent weeks after selling a total of 980 bcf over the four previous weeks.
The combined net long position of 371 bcf was in the 42nd percentile for all weeks since 2010, broadly neutral or slightly bearish.
Working gas inventories were still 462 bcf (+17% or +1.36 standard deviations) above the prior 10-year seasonal average on July 26.
The U.S. storage injection season has passed the half-way point so it is virtually certain inventories will start winter 2024/25 above average.
Ultra-low gas prices have driven record gas consumption by power generators but that has been offset by the continued strength in production and repeated disruption of LNG exports.
After rallying during May and June, inflation-adjusted gas futures prices have retreated back towards the multi-decade lows set between February and April.
From a price and positioning perspective, the balance of risks is strongly weighted to the upside, which has encouraged many fund managers to maintain bullish long positions.
But the same has been true for more than a year, and the anticipated depletion of stocks and surge in prices has been repeatedly delayed, which has enforced a cautious approach.
