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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Hedge Funds Turn Their Back On Oil

Speculative positions in the oil market were precariously balanced between bullish and bearish bets in the week to July 30 as money managers were divided in their response to mixed market signals.

Bets on rising prices in the six most important petroleum futures contracts rose slightly in the last week of July, but bets that prices will drop also increased, as fears of weakening economies and global oil demand growth countered concerns about supply disruptions in the Middle East and outages elsewhere.  

However, the latest available exchange data about hedge funds’ bets on oil prices includes the weekly period ending two days before U.S. President Donald Trump threatened 10-percent tariffs on all remaining Chinese goods imported into the United States, leading to an oil market meltdown on Thursday, with WTI Crude tumbling nearly 8 percent in its biggest one-day drop in four and a half years.

Speculative positioning has changed a lot since the latest exchange data in the week to July 30, and it will be reflected in the next exchange and regulatory reports.

As of July 30, the bullish and bearish bets on oil prices were roughly balanced, with almost equal chances of a rally or a drop in oil. But since July 30, the market sentiment has taken a turn for the worse with concerns about demand outweighing any bullish factor, after the latest tariff threat from President Trump, Reuters market analyst John Kemp says.

In the last week of July, hedge funds and other money managers boosted their net long position—the difference between bullish and bearish bets—in the six most important petroleum futures contracts by the equivalent of 20 million barrels, according to exchange data compiled by Kemp. The net long in Brent Crude increased by 20 million barrels but positioning in WTI Crude was a net selling of 11 million barrels. Portfolio managers raised their bullish bets in WTI by 3 million barrels, but they also increased shorts by 14 million barrels, the data showed. In the last two weeks of July, money managers reduced their net long position in WTI by a total of 44 million barrels. Related: Turning Natural Gas Into Fuel Just Became Cheaper

In the week to July 23, hedge funds and other portfolio managers cut their net long position in the petroleum complex by 65 million barrels, nearly wiping out an increase of 84 million barrels in the previous week.

In the middle of July, the possibility of an imminent Fed rate cut and the flaring-up of the Iran-West tensions in the Middle East and the world’s most important oil shipping lane, the Strait of Hormuz, resulted in hedge funds buying petroleum futures at the fastest pace in nearly a year in the week to July 16, according to exchange data compiled by Kemp.     

In the week to July 16, portfolio managers boosted their net long position in the six most important oil contracts by the equivalent of 84 million barrels, to a total of 647 million barrels. The 84-million-barrel addition to the net long position in the six petroleum contracts was the largest weekly increase in bets on rising prices since August 2018.

Despite the jump in bets on rising oil prices, the overall positioning of hedge funds and other money managers pointed in mid-July to a further upside for oil prices as the ratio of longs to shorts was still way off the highs in April 2019 and September 2018 that were followed by hefty sell-offs.

Two weeks later, the ratio of longs to shorts as of July 30 was at the lowest it has been since January-February this year. While such positioning may have pointed to a price rally, President Trump’s tariff threat essentially wiped out bullish sentiment not only from the oil market, but also from equity markets around the world for several days. The specter of faltering oil demand is the primary driver of oil prices, even more prominently now than just a week ago.

By Tsvetana Paraskova for Oilprice.com

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