Portfolio investors have soured on the outlook for petroleum prices as an anticipated large depletion of inventories during the third quarter has failed to materialise.
Hedge funds and other money managers sold the equivalent of 103 million barrels in the six major futures and options contracts over the seven days ending on July 23.
Combined sales over the last three weeks had totalled 144 million barrels, according to records filed with ICE Futures Europe and the US Commodity Futures Trading Commission.
As a result, funds had cut their net position to just 380 million barrels (19th percentile for all weeks since 2013) from a recent high of 524 million (35th percentile) on July 2.
The most recent week saw sales across the board in Brent (-38 million barrels), NYMEX and ICE WTI (-31 million), European gas oil (-21 million), US gasoline (-9 million) and US diesel (-5 million).
The peak summer consumption season has already passed the half-way point and there has been only a modest depletion of inventories so far.
US stocks of crude oil and refined fuels such as gasoline and diesel have remained close to long-term seasonal averages in recent weeks.
Ample inventories have sapped some of the incipient bullishness among traders and caused spot prices, calendar spreads and crack spreads to retreat.
Funds remain neutral or mildly bearish about US crude but have become very bearish towards Brent and all the refined fuels.
The expected recovery in manufacturing across North America, Europe and China has run out of momentum since the start of April.
And high interest rates continue to deter purchases of expensive durable items such as new cars, home appliances and electrical equipment.
On the services side, there are also signs the post-pandemic surge in travel and tourism has peaked as a result of high prices and cost-of-living pressure on consumers.
The expected depletion of global petroleum inventories has already been pushed back multiple times this year; now it looks like it has been deferred again.
US natural gas
Investors purchased futures and options linked to US gas prices for the first time in five weeks as inflation-adjusted prices slumped back down towards multi-year lows.
Hedge funds and other money managers purchased the equivalent of 151 billion cubic feet (bcf) of futures and options linked to gas prices at Henry Hub in Louisiana over the seven days ending on July 23.
Small-scale buying came after they had sold 980 bcf over the previous four weeks, according to position records filed with the futures regulator.
Working gas inventories remain well above average for the time of year and show only limited if any sign of normalising after an exceptionally mild winter in 2023/24.
Stocks are the second-highest on record for the time of year and still 479 bcf (+17 per cent or +1.35 standard deviations) above the prior 10-year seasonal average.
The surplus has narrowed slowly despite hotter-than-normal temperatures elevating airconditioning demand so far this summer, slow wind speeds, and low gas prices encouraging more gas-fired generation.
The US air-conditioning season has now passed the usual half-way point limiting the potential for further depletion; working inventories are very likely to start the winter heating season higher than average.
The persistent surplus has caused front-month futures prices to slump to less than $2 per million British thermal units in an effort to maximise gas-fired generation and limit further stock accumulation.
After adjusting for inflation, front-month prices are in only the 2nd percentile for all months since the start of the century.
Ultra-low prices seem to have tempted at least some fund managers to book profits by repurchasing previous bearish short positions. Short covering accounted for two-thirds of all the buying in the most recent week.
More generally, however, ,the hedge fund community remains very cautious about the potential for a rebound even from the current exceptionally low price level.
Fund managers held a net position of just 341 bcf in the two major contracts, in only the 42nd percentile for all weeks since 2010.