Column: Oil funds trapped between low inventories and slowing economy: Kemp

LONDON, Oct 31 (Reuters) – Investors’ portfolio oil positions showed significant week-to-week volatility as traders struggled to anticipate the net impact of an economic slowdown amid extreme low inventories of crude oil and diesel.

Hedge funds and other money managers bought the equivalent of 33 million barrels of the six most important petroleum futures and options contracts in the week to October 25.

The last four weeks have seen two large purchases (+62 million and +47 million barrels) and two large sales (-34 million and -50 million barrels) because investor sentiment has been seen-sawed.

The mixed picture continued last week, with heavy purchases of Brent (+29 million barrels), and small purchases of NYMEX and ICE WTI (+6 million) and US gasoline (+6 million).

But that was partly offset by lower sales of US diesel (-4 million) and European gas oil (-2 million).

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Fund managers still have an overall bias in oil with long positions outnumbering shorts by a ratio of 5.17:1 (66th percentile of all weeks since 2013).

But uncertainty is high and confidence is low, with a net position of 503 million barrels (33rd percentile of all weeks since 2013).

In Brent, the long-short ratio is in the 75th percentile (bullish) but the net position is only in the 41st percentile (relatively low confidence).

In middle distillates, the long-short ratio is in the 74th percentile, but the net position is more moderate at the 58th percentile.

Chartbook: CFTC and ICE commitments to traders

Crude oil and distillate inventories in the US and globally are at their lowest seasonal levels in decades, creating an upside bias in prices.

But the US Federal Reserve is raising interest rates at the fastest clip in 40 years to keep inflation out of the economy.

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And most other major central banks followed suit, resulting in a rapid tightening of financial conditions around the world.

The resulting cyclical slowdown is likely to slow crude oil and digest consumption and rebuild inventories to more comfortable levels.

The timing of any rebuild is uncertain, however, and inventories may remain tight or even decrease in the short term.

In addition to economic factors, EU sanctions on maritime and insurance services for crude oil and distillate exports to Russia scheduled to take effect in December and February could further tighten supplies.

With so many conflicting drivers, traders and investors are struggling to form a medium-term view of prices with any conviction, leaving the market with no current direction.

Related columns:

– Oil investors on the defensive as economic forces strengthen (Reuters, Oct. 24)

– OPEC⁺ cuts draw funds back into oil market (Reuters, Oct. 17)

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– Diesel’s sad message for the global economy (Reuters, Oct. 14)

– OPEC⁺ cuts draw hedge funds back into oil market (Reuters, Oct. 10)

– John Kemp is a market analyst at Reuters. The views expressed are his

Editing by Jan Harvey

Our Standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

John Kemp

Thomson Reuters

John Kemp is a senior market analyst specializing in oil and energy systems. Before joining Reuters in 2008, he was a trading analyst at Sempra Commodities, now part of JPMorgan, and an economic analyst at Oxford Analytica. His interests include all aspects of energy technology, history, diplomacy, derivative markets, risk management, policy and transitions.

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