• 2 minutes Oil Price Could Fall To $30 If Global Deal Not Extended
  • 5 minutes Middle East on brink: Oil tankers attacked off Oman
  • 8 minutes CNN:America's oil boom will break more records this year. OPEC is stuck in retreat
  • 9 hours Here We Go: New York Lawmakers Pass Aggressive Law To Fight Climate Change
  • 4 hours The Inconvenient Truth Of Electric Cars
  • 1 hour Iran downs US drone. No military response . . Just Completely Destroy their Economy. Can Senator Kerry be tried for aiding enemy ?
  • 3 hours Oil Demand Needs to Halve: Equinor
  • 9 hours Magic of Shale: EXPORTS!! Crude Exporters Navigate Gulf Coast Terminal Constraints
  • 11 hours Ireland To Ban New Petrol And Diesel Vehicles From 2030
  • 11 hours Is $60/Bbl WTI still considered a break even for Shale Oil
  • 6 hours Solar Panels at 26 cents per watt
  • 4 hours The Plastics Problem
  • 12 hours Wonders of Shale - Gas, bringing investments and jobs to the US
  • 12 hours NATO Article 5: Attack on one member is attack on all. Members all must come to defense . . . NOT facilitate financial transactions to circumvent and foil US Sanctions. Somebody please tell Angela.
  • 5 hours Huge UK Gas Discovery
  • 8 hours Hydrogen FTW... Some Day
  • 7 hours Section 232 Uranium
  • 5 hours Green vs. Coal: Bavaria Seeks Fast-Track German Coal Exit in Snub to Merkel Plan
Alt Text

Middle East Torpedo Attacks Send Oil Prices Soaring

Oil prices jumped on Thursday…

Alt Text

The Oil Price Risk Analysts Are Ignoring

While geopolitical tensions in the…

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. 

More Info

Premium Content

Smart Money Turns Increasingly Bearish On Oil

Over the past month, hedge funds and other portfolio managers have been liquidating some of their bets that oil prices will rise, as concerns about the future of global economy grew amid an intensifying U.S.-China trade war.

Money managers have reduced their net long position—the difference between bullish and bearish bets—over the four weeks to May 21, according to the latest exchanges reports compiled by Reuters market analyst John Kemp.  

The change in the net long position in the week to May 21 was almost exclusively due to liquidation of bets that prices will rise, not the opening of fresh short positions that prices will drop.

Portfolio managers have been selling lately Brent Crude and WTI Crude, as well as U.S. gasoline futures, but they have been buying U.S. heating oil and European gasoil, possibly expecting increased demand for heating oil and gasoil in the run-up to the new shipping fuel regulations by the IMO starting January 2020, according to Kemp.

Although demand for heating oil and gasoil—and middle distillates as a whole—is a core gauge of economic activity because they are used in farming, transportation, manufacturing, and mining, and are the first to suffer from an economic downturn, fund managers are likely betting on increased demand for heating oil and gasoil because of the shipping regulations and regardless of a gloomy global economic outlook, Kemp argues.  

Hedge funds are therefore on the defensive and shifting bullish bets on those futures in the petroleum complex, for which they expect demand to increase regardless of an economic downturn, Kemp says.  

In crude oil, money managers have reduced their combined net long position in Brent and WTI by 79 million barrels over the four weeks to May 21, after having boosted the net long position by 480 million barrels over previous 15 weeks, according to exchange data compiled by Kemp. Related: Oil Prices Plunge On U.S.-China Trade War Escalation

In one month, hedge funds pulled back from the overly bullish position as of April 23, when long positions in Brent and WTI outnumbered shorts in a ratio of 11:1—the most lopsided bullish positioning since October 2018, when oil prices started crashing to lose 40 percent until the end of 2018.

The most recent available data was published on May 21, two days before oil prices crashed 5% in one day for their worst daily performance in six months.

The dip in net long positions in the week to May 21 was almost exclusively driven by longs liquidating, rather than shorts opening, Warren Patterson, Head of Commodities Strategy at ING, said on Tuesday.

“The US market is clearly well supplied whilst time spreads suggest that Brent is tight and therefore we are seeing the WTI/Brent discount widen in order to pull out further crude oil from the US,” Patterson said.

According to Helima Croft, global head of commodity strategy at RBC Capital Markets, the global physical market is increasingly tighter.

Going forward, oil prices and the positioning of the money managers will be driven by a downward pressure from concerns about slowing economy and demand, and an upward pressure coming from tighter physical supply from OPEC cuts, lower exports from Iran and Venezuela, and geopolitical tension in the Middle East.  

Iran’s exports are expected to slump to just 500,000 bpd in the coming months, down by 2 million bpd compared to the year-ago export level of 2.5 million bpd, RBC’s Croft told BNN Bloomberg on Tuesday.

Venezuela’s production could halve from the current 700,000 bpd by year-end if the U.S. further tightens the screws on sanctions, Croft noted. Related: The Single Biggest Challenge For The Oil & Gas Industry

While these supply outages would be supportive for oil prices, the trade war, and the market sentiment of a “macro sum of all fears situation” could continue to depress prices, RBC’s expert told Bloomberg.

In a bearish market sentiment, oil may “get hammered” along with equities because of the fear of demand destruction, even though said demand destruction may not even materialize, Croft said.   

A “sum of all fears” scenario has already begun to weigh on the bullish sentiment of money managers who appear to have started to bet defensively on parts of the petroleum complex where they expect firm demand.

To be sure, hedge funds are liquidating shorts as well as longs, so they are not betting massively on an oil price drop. Longs on crude oil still outnumber shorts by a ratio of 7:1, according to Kemp’s data. Yet, if the “sum of all fears” scenario were to materialize with the global economy materially slowing down, the bulls could step back letting the bears roar.  

By Tsvetana Paraskova for Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News