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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 Bullish On Oil Despite Demand Fears

  • Hedge funds and money managers are betting on higher oil prices ahead of the EU embargo on Russian crude imports by sea.
  • The move suggests that investors expect supply disruptions to offset weak oil demand around the world in the fourth quarter.
  • Money managers’ longs hit a five-month high in the first week of November, with WTI longs jumping by 8% and Brent longs rising by 4.5%.
Bullish

Money managers are betting again on rising oil prices, positioning themselves for a potential large disruption in the market in just three weeks when the EU embargo on Russian crude oil imports by sea and the EU-UK-G7 price cap on Russian oil are set to enter into force.  

Over the past few weeks, hedge funds and other investors have increased bullish bets in the six most important petroleum futures and options contracts traded globally, according to data from futures exchanges. The move suggests that money managers expect the oil market to remain tight amid huge uncertainties about Russia’s oil supply once the EU embargoes on crude and product imports enter into effect in December and February, respectively, and despite a worsening outlook for the global economy. 

Still, traders are not rushing into bullish bets. But the largest long position in both the Brent and WTI benchmarks in five months at the end of the latest reporting week seems to suggest that money managers expect a supply disruption from Russia to offset the weak global oil demand in the fourth quarter.  

The OPEC+ cuts as of November, the signs that China is easing some of its draconian Covid-related restrictions, and the still unknown volumes that could be lost from Russia as soon as December have made hedge funds more bullish on oil in recent weeks than they were during the summer when fears of recession trumped every other macro or fundamental factor in the oil markets. 

During the latest reporting week to November 8, money managers bought the equivalent of 41 million barrels of the six most traded petroleum futures and options contracts, with the buying heavily concentrated in Brent Crude and WTI Crude, according to exchanges data compiled by Reuters’ senior market analyst John Kemp

Hedge funds were net buyers of oil contracts in five out of the past six weeks, which lifted the ratio of long to short positions to 5.36:1 from 3.78:1, according to Kemp’s estimates. 

Money managers’ longs in the U.S. benchmark, WTI Crude, jumped by 8% to 241,000 lots, and the long positions in Brent Crude rose by 4.5% to 238,000 lots in the week to November 8, said Ole Hansen, Head of Commodity Strategy at Saxo Bank. The combined longs in both futures contracts hit a five-month high at 452,000 lots, primarily driven by fresh longs as the U.S. dollar weakened and China eased some Covid restrictions, Hansen added. 

So, money managers have become more bullish on crude oil, expecting supply disruptions in the coming weeks as the EU embargo on Russian crude imports by sea kicks in. The weakening economic outlook continues to weigh on the market, but traders seem to expect that the initial chaos with the Russian import ban and price cap on its oil will push prices higher. 

When the crude and product embargoes come into full force in December and February, respectively, an additional 1.1 million bpd of crude and 1 million bpd of diesel, naphtha, and fuel oil from Russia will have to be replaced, the International Energy Agency (IEA) said in its monthly report on Tuesday.

“For crude oil, no significant buying from Russia outside China, India, and Türkiye has appeared despite massive discounts. A further rerouting of trade should help ease pressures but a shortage of tankers is a major concern, especially for ice-class vessels required to load out of Baltic ports during winter,” the agency noted. 

The IEA, however, also said the economic outlook has worsened, and global oil demand is set to drop by 240,000 bpd in the fourth quarter compared with the same period last year. 

“China’s persistently weak economy, Europe’s energy crisis, burgeoning product cracks and the strong US dollar are all weighing heavily on consumption,” the IEA said. 

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Despite the demand destruction, money managers have shown with their most recent positioning that the ban and price cap on Russian oil, as well as the OPEC+ cuts, have the potential to move oil prices higher.

By Tsvetana Paraskova for Oilprice.com

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