Hedge funds bearish on crude, more bullish on cracks

Portfolio investors are bearish on the outlook for petroleum but increasingly think prices for refined fuels will be somewhat stronger than crude on account of low inventories and limited amounts of spare refining capacity.

Hedge funds and other money managers made no overall change in their position in the six most important petroleum futures and options contracts over the seven days ending on May 16.

Net sales of crude oil (-18 million barrels) were offset by purchases of refined fuels (+18 million barrels), according to position records published by ICE Futures and the U.S. Commodity Futures Trading Commission.

Funds held a net position of 249 million barrels in crude (5th percentile for all weeks since 2013) with long positions outnumbering shorts by a ratio of 2.35:1 (13th percentile).

In refined fuels, however, funds held a net position of 36 million barrels (20th percentile) with longs outnumbering shorts by 1.40:1 (20th percentile).

Investors are positioned for a significant business cycle downturn hitting petroleum consumption and prices in the remainder of 2023.

But prices for fuels such as gasoline and diesel are expected to hold up better than crude because fuel stocks are well below long-term seasonal averages and refineries are already processing more crude than usual.

Gasoline is expected to be the strongest relative performer because consumption is less exposed to the industrial cycle than either crude or middle distillates such as diesel and gas oil.

Funds held a position of 45 million barrels in gasoline (38th percentile) on May 16, with longs outnumbering shorts by 4.20:1 (50th percentile).

U.S. NATURAL GAS
Investors became slightly more bullish about the outlook for U.S. gas prices following evidence that low prices are starting to curtail drilling activity, which will gradually eliminate surplus production.

Funds purchased the equivalent of 167 billion cubic feet in the seven days ending on May 16, after selling a total of 206 billion cubic feet during the previous three weeks.

Even after the recent buying, the funds’ position was still only 47 billion cubic feet net long (33rd percentile for all weeks since 2010), with long positions outnumbering shorts by 1.02:1 (33rd percentile).

Working gas inventories were +267 billion cubic feet (+14% or +0.61 standard deviations) above the prior ten-year seasonal average on May 12, with the surplus essentially unchanged from nine weeks earlier on March 6.

But the number of rigs drilling for both gas and oil has started to fall rapidly in recent weeks, which will curtail production of both gas-field gas and associated gas from oil-rich fields.
Source: Reuters (John Kemp is a Reuters market analyst)