Oil funds temper bearishness after Opec+ reassurance

Portfolio investors last week repurchased some of the petroleum they had sold the week before after Saudi Arabia and its Opec+ allies stressed any future production increases would be contingent on market conditions.

Hedge funds and other money managers purchased the equivalent of 80 million barrels in the six most important petroleum futures and options contracts over the seven days ending on June 11.

Purchases reversed about 40 per cent of the 194 million barrels sold the week before after Opec+ surprised investors by announcing plans to start increasing production from the start of October.

In the most recent week, the buying wave was led by crude (+68 million barrels), spread between NYMEX and ICE WTI (+42 million) and Brent (+26 million), reversing some of the heavy sales a week earlier.

There was some significant buying in European gas oil (+17 million barrels) but no change in US gasoline and further sales in US diesel (-5 million).

Post-meeting briefings to selected media and analysts dispelled fears Opec+ would flood the market with extra barrels from the fourth quarter of 2024.

The result was that prices rebounded to pre-meeting levels while positions were somewhat but not completely restored.

Even after the round-trip, however, fund positions remain very bearish for all parts of the petroleum complex with the partial exception of European gas oil.

The combined position across all six contracts of 288 million barrels was in only the 6th percentile for all weeks since 2013. Bullish long positions outnumbered bearish short ones by a ratio of just 1.96:1 (11th percentile).

Positions across the complex were uniformly bearish (25-49th percentiles) or very bearish (24th percentile and below) showing very little confidence among investors prices will rise later this year.

The enormous overhang of spare capacity held by Opec+ members as well as continued production growth from the United States, Canada, Brazil and Guyana are expected to limit price increases in crude.

On the fuel side, inventories of both gasoline and diesel have been rising relative to the seasonal trend in the United States, and consumption growth for fuels remains tepid across North America, Europe and China.

But investors are betting drilling and production cuts announced in February will eventually eliminate the surplus, with summer heatwaves, increased gas-fired generation, and faster LNG exports accelerating the process.