Crude oil prices stalled as hedge funds sold

Crude oil prices have stalled as the wave of hedge fund buying that helped lift them throughout July and the first part of August has been replaced by gentle selling.

Hedge funds and other money managers sold the equivalent of 30 million barrels in the six most important petroleum futures and options contracts over the seven days ending on Aug. 22, Reuters reports.

Nearly all the sales were in crude (-29 million barrels) with sales of NYMEX and ICE WTI (-16 million barrels) and Brent (-13 million barrels), according to position records filed with regulators and exchanges.

There was a mix of profit-taking after the previous rally by liquidating existing bullish long positions (-18 million barrels) and speculative short sales (+11 million barrels) in anticipation of future price falls.

The net position in crude has fallen in each of the three most recent weeks to 352 million barrels (21st percentile for all weeks since 2013) on Aug. 22 down from 396 million barrels (29th percentile) on Aug. 1.

Extended production cuts by Saudi Arabia and Russia have been offset by fears about China’s faltering economic rebound from COVID-19 lockdowns and its impact on oil consumption.

There are also increasing indications the United States is relaxing sanctions on crude exports from Iran and Venezuela in exchange for diplomatic objectives and to keep a lid on oil prices.

Reflecting the shift in sentiment, fund managers boosted short positions in NYMEX WTI by a total of almost 21 million barrels in the two weeks since Aug. 8, the first new short-selling since the end of June.

The fund community remains bullish on the outlook for fuels such as gasoline and diesel, given low inventories, but managers are more cautious about crude, despite Saudi efforts to boost sentiment by extending production cuts.

US NATURAL GAS

Portfolio investors are still struggling to become bullish about the outlook for US gas prices despite a recent erosion of surplus inventories as a result of the heatwave gripping much of the central United States.

Hedge funds and other money managers sold the equivalent of 297 billion cubic feet of futures and options linked to Henry Hub gas prices over the seven days ending on Aug. 22.

The net long position of 410 billion cubic feet (41st percentile for all weeks since 2010) was not significantly different from 415 billion cubic feet three weeks earlier.

Working gas inventories in underground storage were just 156 billion cubic feet (+5 per cent or +0.50 standard deviations) above the prior 10-year seasonal average on Aug. 18.

The surplus has narrowed consistently from +299 billion cubic feet (+12 per cent or +0.81 standard deviations) at the end of June.

The prolonged heatwave across the central United States since mid-June and very low gas prices have combined to produce record gas consumption by power producers to meet demand for air-conditioning.

But gas production remains high and rapidly developing El Niño conditions in the Pacific are likely to herald a more mild winter across the northern United States that would depress gas consumption later in 2023.

The U.S. National Oceanic and Atmospheric Administration’s Climate Prediction Center (CPC) is forecasting El Niño conditions will prevail between December and February with a probability of 95 per cent.

Most forecast models indicate El Niño will be a strong one, likely to have a pronounced impact on climate in North America (“ENSO: Recent Evolution, Current Status and Predictions”, CPC, Aug. 28).

Mild or moderate El Niño conditions may not have much observable impact on seasonal weather patterns but a strong El Niño is likely to be much more noticeable and could depress gas use significantly.

If temperatures are above the long-term seasonal average, prices will have to remain lower for longer to enforce a corresponding reduction in drilling and production to keep inventories within storage limits.