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Funds Sell Oil As Coronavirus Infections Rise

Hedge funds sold petroleum last week for the sixth time in eight weeks as resurgent coronavirus infections in China, Europe and North America dampened hopes of a rapid resumption in long-distance passenger aviation.

Hedge funds and other money managers sold the equivalent of 64 million barrels in the six most important petroleum futures and options contracts in the week to Aug. 10, exchange and regulatory records showed.

Total sales over the last eight weeks have been equivalent to 213 million barrels, with most selling occurring in crude (-183 million) rather than refined products (-29 million).

Nearly all the changes have come from the reduction of previous bullish long positions (-200 million barrels) rather than the initiation of fresh bearish short ones (+13 million).

The most recent week saw this pattern continue, with sales of Brent (-30 million barrels), NYMEX and ICE WTI (-22 million) and European gas oil (-22 million) but buying in U.S. gasoline (+5 million) and U.S. diesel (+4 million).

The combined position across all six contracts has fallen to 733 million barrels (in the 67th percentile for all weeks since 2013) down from a recent peak of 945 million barrels (85th percentile) in the middle of June.

Similarly, the ratio of long to short positions has dropped to 4.67:1 (62nd percentile) from 6.06:1 (80th percentile) over the same period.

Portfolio managers remain bullish about the medium-term outlook for petroleum prices, but less so than at the start of the northern summer before coronavirus infection rates started to rise again.

There is increased wariness about a short-term weakening in the production-consumption balance and pull back in prices even if the market is expected to tighten in 2022.

The last eight weeks have seen a small but significant increase in money managers’ short positions in NYMEX WTI (+30 million), marking the start of the first new cycle of short sales since May 2020.

In NYMEX and ICE WTI, fund manager long positions outnumber short ones by 5:1, down from 14:1 in the middle of June, as much of the speculative froth has been skimmed off the market.

But U.S. low-sulphur diesel futures and options have been the exception to the deflation of the bull market, with hedge funds boosting their position by a total of 16 million barrels since June 15.

Portfolio managers hold a net position of 42 million barrels in diesel, with long positions outnumbering shorts by 3.5:1, both measures at their highest since October 2018.

The last time hedge fund managers were this bullish about diesel was before the intensification of the trade war between China and the United States, when the global economy was growing strongly.

Divergent positioning on U.S. diesel versus U.S. gasoline and crude reflects optimism about strong economic growth, industrial output and freight transport, coupled with greater caution about the prospects for the service sector in general and aviation in particular.
Source: Reuters (Reporting by John Kemp; Editing by Barbara Lewis)

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