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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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Why Hedge Funds Are Turning Bullish On Oil Again

Money managers put an end to weeks of sell-offs in the most traded petroleum contracts last week, signaling that the oil price correction seen in August may have run its course.  

Last month, oil prices registered their first monthly loss since March, and the biggest such loss since October 2020, with both WTI and Brent benchmarks dipping more than 7 percent in August. 

Concerns about the pace of global oil demand amid surging COVID cases depressed the oil market. Hints that the Fed would start tapering the asset-buying program have also weighed on sentiment in recent weeks. 

But in the last seven days in August, hedge funds and other portfolio managers bought the six most important petroleum futures and options contracts at the second-highest buying rate so far this year.   

Hedge funds bought the equivalent of 60 million barrels of the contracts in the week ending August 31, according to data from exchanges compiled by Reuters market analyst John Kemp.

This compares with money managers selling a total of 268 million barrels in the oil complex in the ten weeks before that. 

Related: The U.S. Power Grid Is At Risk Of Catastrophic Failure

Hedge fund positioning in the U.S. crude benchmark, WTI, was almost unchanged in the week to August 31, but there was significant buying into the international benchmark, Brent

Middle distillates, including U.S. gasoline and diesel futures and options contracts, also saw high buying interest after Hurricane Ida disrupted most of the crude oil production in the U.S. Gulf of Mexico and forced temporary shutdown at nine refineries in Louisiana. 

The Commitment of Traders (COT) report in the week to August 31 saw strong buying of fuel products and natural gas in response to Hurricane Ida disruptions, Ole Hansen, Head of Commodity Strategy at Saxo Bank, commented. While WTI Crude saw no change in the overall long position, the Brent long rose by 11 percent to 274,000 lots, Hansen added.

The increase in the Brent Crude net long position—the difference between bullish and bearish bets—“shouldn’t be too much of surprise, given the recovery that we have seen in oil prices in recent weeks,” ING strategists Warren Patterson and Wenyu Yao said earlier this week.

“The increase was driven by a combination of both fresh longs and short covering,” they added. 

While hurricane-related outages spurred some of the buying in petroleum at the end of August, the end of the sell-offs in the oil complex from the previous ten weeks signals that the market could be primed for a new wave of increased long positions. 

Oil prices are not expected to surge by the end of the year due to the still lingering concerns about demand with the Delta COVID variant, but prices are not expected to crash soon, either. 

COVID concerns could delay the oil demand recovery, which will not leave much upside for oil prices for the rest of 2021, analysts told the monthly Reuters poll at end-August, revising down their forecast for this year for the first time since November. Still, Brent prices are set to average $68.02 per barrel throughout this year, and WTI is expected to average $65.63, down from a forecast of $66.13 in the July poll. 

Despite the more uncertain outlook on oil with the Delta variant, some bullish signs have emerged over the past week. 

Europe’s road fuel demand rebounded during the summer holidays, with gasoline demand back to and even higher than pre-COVID levels of the 2019 holidays. 

In addition, rush-hour traffic in England’s largest cities returned to pre-COVID levels at the start of this week as schools returned from holidays and commuters returned to offices. Rush-hour traffic congestion in London, Birmingham, Wolverhampton, Nottingham, Leicester, and Liverpool was back at the levels seen in 2019, according to figures cited by The Times. 

China, the world’s top crude importer, saw its oil imports rebound in August from a low in July. Analysts said earlier this month that Chinese refiners were already ramping up buying as the latest round of Covid-19-related movement restrictions ended and were willing to pay higher prices to secure supply for the end of the year. 

Oil prices may not have much room to rise in the near term, but last month’s correction may be over.

By Tsvetana Paraskova for Oilprice.com

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