Concerns about the economy and new banking sector jitters have sent oil traders rushing for the exits and cutting their bullish bets on crude oil again.
As more speculators leave the market - with open interest in U.S. crude oil futures at its lowest in three years - prices are set for more extreme volatility.
WTI Crude, the U.S. benchmark, saw the biggest drop in the net long position - the difference between bullish and bearish bets - in six weeks in the week to May 2, data from the U.S. Commodity Futures Trading Commission (CFTC) showed on Friday.
The previous large drop in bullish bets had taken place right before early April when the OPEC+ group surprised the oil market by announcing additional cuts to production between May and December 2023 to ensure the "stability of the market."
The OPEC+ move burned the short sellers, following through with the proverbial promise of Saudi Energy Minister Prince Abdulaziz bin Salman from 2020, "I'm going to make sure whoever gambles on this market will be ouching like hell."
After the production cuts were announced, prices spiked for two weeks until the middle of April, before negative sentiment about the economy and underwhelming Chinese recovery took over again and drove prices back down to the low $70s. WTI Crude even fell below the $70 a barrel mark last week.
Speculators have been consistently caught off-guard in the past two months, and many have now opted to stay away. Lower open interest and liquidity in the market is bound to make price swings even more extreme, according to analysts.
"In short, the oil market needs more players on the field," Michael Tran, managing director at RBC Capital Markets, told Bloomberg.
But in the week to May 2, money managers cut their long positions and added short positions, cutting their net bullish bets in both WTI Crude and Brent Crude futures and options contracts, data from exchanges showed.
Driven by heavy selling in energy, bullish bets on the major commodities futures plunged by one-third in the latest reporting week to the lowest since June 2020, Ole Hansen, Head of Commodity Strategy at Saxo Bank, noted. Brent, WTI, and European gasoil - the proxy for diesel - were the hardest hit by selling.
The technical downside break forced speculators to cut their net long position in WTI Crude by 36,000 lots and in Brent by 69,000 lots in the week to May 2. The combined net long position in the two most important crude oil futures and options contracts was slashed by one-fourth, while the net short position in ICE gasoil futures continued to swell to a fresh high in more than seven years.
"A nightmare two-month period for momentum traders continued in the week to May 2," Hansen commented.
"During an eight week period the crude oil market has seen a banking crisis, an Opec cut driving a spike and subsequent focus on gap closing, and fresh demand concerns," he added.
Speculators have responded by selling 393,000 lots and buying 213,000 lots, the bulk of these at unprofitable levels, according to Saxo Bank's head of commodity strategy.
The economy in the U.S., the pace of the Chinese recovery, and the upcoming OPEC+ meeting in early June will continue to drive oil markets, while fresh bank runs could quickly sour sentiment again in the coming weeks.
Reports emerged last week, when oil prices crashed again, that OPEC+ would hold its June 4 meeting in person. The last time OPEC+ ministers met in person in Vienna was in October 2022, when the alliance announced oil production cuts from November 2022 through December 2023.
In the meantime, speculators and momentum traders could be more careful with bets in the oil market, which would leave prices exposed to wild swings in either direction.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More