Money managers have become increasingly bullish on crude oil amid the geopolitical tensions in the Middle East and growing confidence that the U.S. will successfully avoid a recession this year.
At the end of January, hedge funds and other portfolio investors continued to buy crude oil, expanding the net long position—the difference between bullish and bearish bets—to the largest they have held since last September when oil prices started sliding on concerns about economies and oversupply on the market.
More confidence in the U.S. economy, the mass re-routing of crude and fuel tankers away from the Suez Canal and the Red Sea, and falling inventories at Cushing, the hub providing the physical delivery mechanism for the NYMEX WTI futures contract, have given traders more reasons to be bullish on both Brent and WTI.
Traders Turn More Bullish on Crude
The bearishness from December has given way to a more bullish sentiment, which has supported prices in the latter part of January and prompted investors to start building longs again after being the most bearish on the crude complex at the end of last year since March 2023.
Hedge funds and other portfolio managers ended the last week of 2023 with the most new bearish positions in futures and options contracts since March and the second-largest jump in weekly short additions since 2017.
Traders raced to add short positions at the end of last year. One month later, they rushed to add new longs and close out shorts, reversing the bearish trend from December. Related: Buffett-Backed Occidental CEO Says Oil Shortage by 2025
The bullish mood on the market started building after the middle of January.
In the week leading up to January 23, money managers bought a lot of WTI contracts and liquidated a lot of shorts, slashing their bearish bets on WTI by the most in nine months.
Crude oil inventories at Cushing have dropped to their lowest level for this time of year in over a decade, suggesting that a short squeeze could be coming for the bearish portfolio managers who had amassed a lot of short positions in U.S. crude oil futures.
The falling stocks at the hub providing the physical delivery mechanism for the NYMEX WTI futures contract may have already started to unnerve traders who had turned extremely bearish on U.S. WTI Crude by the middle of January.
In the week to January 23, the gross short in WTI Crude was 78,598 lots after the largest cut in shorts since April 2023.
In the latest reporting week to January 30, portfolio managers continued to cut short positions and add longs. They bought the equivalent of 97 million barrels in the six most important petroleum futures and options contracts, per data from exchanges compiled by Reuters’s senior market analyst John Kemp.
The buying was focused on Brent, but U.S. crude also saw increased longs, as did European gasoil and U.S. diesel.
Europe’s diesel prices have jumped in recent weeks amid tightening supply due to Red Sea shipping disruptions that have threatened to test the resilience of European economies, which have narrowly avoided recessions in recent months.
In the week to January 30, the combined crude oil net long in Brent and WTI jumped by 69,000 contracts—the most since mid-December—to 412,000 contracts “on technical buying following a geo-tension supported upside break,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote on Monday in an analysis on the commitment of traders reports.
“However, failure to keep the geopolitical risk premium inflated after the reporting week ended, helped drive the end of week slump.”
As a result of accelerated buying, hedge funds and other portfolio investors held, as of January 30, the largest net long position in ICE Brent since September, ING analysts Warren Patterson and Ewa Manthey said.
“However, given that the bulk of this move was made up of fresh buying and considering the price action in Brent since last Tuesday, it is likely that a large amount of these fresh longs have already liquidated,” they added.
Despite the price decline at the end of last week on hopes of an Israel-Hamas ceasefire, oil prices ended January with the first monthly gain since September 2023.
Oil Price Gains Capped
Despite the more bullish sentiment on the market, Brent oil prices have so far failed to break out above the $80 per barrel threshold as speculation about a Hamas-Israel truce and strong U.S. jobs data potentially pushing the first rate cut further out have been capping gains.
A strong U.S. job report on Friday dashed hopes of a Fed rate cut as soon as March, and many analysts now expect the first easing at some point in the summer.
Before the jobs report, Fed Chair Jerome Powell had already said on Wednesday after the Fed kept interest rates unchanged that a March rate cut is unlikely.
“The January jobs report was pretty dramatic, implying there may be ‘no landing’”, David Donabedian at CIBC Private Wealth US told Bloomberg.
“The economy is ripping ahead.”
A strong economy is good news for oil demand, but a more cautious approach to the start of rate cuts is keeping a lid on oil prices and keeps them in a narrow trading range.
By Tsvetana Paraskova for Oilprice.com
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