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Shale Bleeds Cash Despite Best Quarter In Years

The second quarter earnings results…

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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The Two Forces In Oil Markets That Keep Money Managers Awake At Night

Oil prices have struggled for direction over the past week, torn between the two key fundamental forces—weakening global oil demand growth and uncertainties over supply.

So have hedge funds and other money managers whose speculative positioning in the oil market has seen little overall change in the net position since June, despite weekly fluctuations in buying or selling in the six month important petroleum futures contracts.

Hedge funds continue to diverge over where oil prices are going next, as concerns about faltering demand are countering the hopes of the bulls that Saudi Arabia would really ‘do whatever it takes’ to end the glut and stop the recent price slides, which were driven by fears that the U.S.-China trade war will take a toll on the global economy and consequently, on global oil demand growth.  

In the week ended August 6, portfolio managers cut their net long position—the difference between bullish and bearish bets—in the six petroleum contracts by the equivalent of 25 million barrels, according to exchange data compiled by Reuters market analyst John Kemp.

This selling of 25 million in the week to August 6 didn’t impact the overall speculative positioning since the middle of June, because it basically reversed the prior week’s buying of 20 million barrels.

In the last week of July, hedge funds and other money managers boosted their net long position by the equivalent of 20 million barrels, according to exchange data compiled by Kemp. Bets on rising prices rose slightly in the week to July 31, but bets that prices will drop also increased, as fears of weakening economies and oil demand growth countered concerns about supply disruptions in the Middle East and outages elsewhere.   Related: New Offshore Boom Is Propping Up This Niche Market

In the following week to August 6, hedge funds cut their net long position in Brent Crude by 13 million barrels, but they boosted the net long position in WTI Crude by 9 million barrels in the week which saw on August 1 oil prices tumbling in their worst one-day drop in years after U.S. President Donald Trump threatened 10-percent tariffs on all remaining Chinese goods imported into the United States. The renewed trade war lead to an oil market meltdown in the first days of August, with WTI Crude plunging by nearly 8 percent in its biggest one-day drop in four and a half years.  

Yet, in that week, hedge funds increased their net long position in WTI Crude by 5.4 percent, with longs up 3.5 percent and shorts down 0.5 percent, according to data from the U.S. Commodity Futures Trading Commission cited by Bloomberg. The increase in longs followed two weeks of short-selling in WTI right before President Trump abruptly ended the tentative trade war truce with the announcement of more tariffs coming.

After August 6, up to which the latest exchange data is available, oil prices recovered somewhat amid reports that Saudi Arabia had approached other members of OPEC to discuss possible steps they can take to stop the price slide. The Saudis were also quick to assure the market last Thursday that despite what they see healthy demand in all regions, they would keep exports below the 7-million-bpd mark and will do so at least through September.  

While the market speculates what, if any, could be OPEC’s next moves, outlooks for global oil demand growth are getting gloomier.

Last week, the EIA lowered its global oil demand growth outlook for 2019 to 1 million bpd. Related: Oil Spikes As US Delays Tariffs On Chinese Goods

The International Energy Agency (IEA) also revised its demand growth estimates for 2019 down by 100,000 bpd to 1.1 million bpd, after seeing that between January and May demand growth was just 520,000 bpd, the lowest increase for the period since 2008

“Clearly, the current weakness in the market reflects concerns over demand growth for the remainder of this year, as well as 2020, particularly given the current macro environment, and a ratcheting up in the trade war,” ING’s Head of Commodities Strategy, Warren Patterson, said last week, expecting 2020 to be even more bearish in terms of global oversupply, while “the longer the trade war drags on, the more downside risk there is” around demand growth outlooks.

Goldman Sachs, for example, no longer sees the U.S. and China reaching a trade deal before the 2020 presidential election in the United States, and says that concerns about a recession due to the trade spat have grown.

Going forward, hedge funds will look at trade war developments for clues about oil demand, and at Saudi Arabia, OPEC, and the tension in the Middle East for possible bullish factors on the supply side.

By Tsvetana Paraskova for Oilprice.com

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