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Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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Traders Dumped Oil Despite Middle East Tensions

  • Reuters' John Kemp: last week traders quit oil and fuels at one of the fastest rates for the past decade.
  • For context, the last three weeks have seen institutional traders sell a total of 197 million barrels after building positions equaling 398 million barrels over the previous 12 weeks.
  • Uncertainty about the global economy and fears of a new wave of inflation keeps traders on edge.
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Institutional traders are dropping their oil positions as the outlook for the commodity—and the global economy—becomes marred in even more uncertainty.

There has also probably been some profit-taking among hedge funds and other large oil futures market players after oil prices surged above $90 following the latest OPEC meeting earlier this month.

The profit-taking started soon after the meeting, but the pace of exiting oil positions has accelerated recently. Reuters’ market analyst and columnist John Kemp reports that last week, traders quit oil and fuels at one of the fastest rates for the past decade, reducing their exposure by a total of 140 million barrels.

For context, the last three weeks have seen institutional traders sell a total of 197 million barrels after building positions equaling 398 million barrels over the previous 12 weeks.

Concern about the immediate future of the global economy is certainly one reason for this. The International Monetary Fund said this week higher energy prices would contribute to inflation, stoking the fears. According to the lender, a 10% increase in the price of oil would add 0.4% to inflation, aggravating an already unstable situation in many parts of the world.

“Debt levels are at record levels and at the same time we are in this higher-for-longer interest [rate] environment. There is a lot . . . that could go wrong,” Gita Gopinath, deputy head of the IMF said, as quoted by the FT.

Indeed, speaking of debt, the Wall Street Journal recently reported that for the first time in history, there is uncertainty about the placement of the latest issue of U.S. sovereign debt. There has been a significantly higher than usual supply of Treasury bonds this year, sending U.S. debt to a record, but there are indications that demand may not correspond to that higher demand. Related: Oil Markets Remain On Edge As Biden Heads To Israel

There is also the geopolitical factor, as well. With a new war in the Middle East, it appears the biggest question is whether Iran and the United States will become involved in it more directly. Should this happen, there appear to be unanimous expectations of an oil price surge.

That price surge, however, would hit economies, and it would hit them hard, which could mean traders are being pre-emptive, especially since they are not switching from bullish to bearish positions, meaning they do not expect prices to slump anytime soon.

Meanwhile, in some positive news for a change, the media reported that the U.S and Venezuela may be on the way to reaching a deal that would make the U.S. lift sanctions on Caracas. The news sent oil prices 1% lower.

The situation is perhaps more interesting in gas markets. Reuters’ Kemp noted that while institutional traders sold oil, they bought U.S. gas last week. They may continue to do so as global gas supply disruption risk runs high.

First, it was the war between Israel and Hamas that pushed gas prices higher, especially after the Israeli government told Chevron to shut down production at the Tamar offshore field for safety reasons. Gas from Tamar flowed to Egypt, where it was liquefied and exported, including to Europe.

Then, reports began coming in that workers at Chevron’s two Australian LNG projects are once again planning to strike, which immediately sent European gas prices higher. However, Europe does not import LNG directly from Australia, with one exception last year; any danger of supply disruption in a market as tight as LNG is bound to affect prices in one of the biggest importers.

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This extra volatility of prices will likely persist over the next few months, with Europe increasingly leaning on U.S. LNG rather than other gas suppliers such as Azerbaijan and Qatar due to certain controversy over the former’s actions in the Nagorni Karabakh region and the latter’s long-standing financial support of Hamas.

By Charles Kennedy for Oilprice.com

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