Oil funds’ first wave of virus-selling loses momentum
Hedge funds again sold petroleum last week as fears about a coronavirus-driven recession intensified, but the rate of sales decelerated for the third week running.
The slowing rate of sales indicated the wave of long liquidation and short-selling might have been nearing a conclusion, until further evidence of coronavirus transmission outside China emerged later in the week.
Hedge funds and other money managers sold the equivalent of 16 million barrels in the six most important petroleum futures and options contracts in the seven days ending on Feb. 18.
But sales were slower than in the week ending Feb. 11 (74 million barrels), Feb. 4 (131 million barrels), and Jan. 28 (147 million barrels), according to position data from regulators and exchanges.
Portfolio managers have sold a total of 457 million barrels over the last six weeks, substantially reversing cumulative purchases of 533 million over the previous three months.
Funds were sellers last week of NYMEX and ICE WTI (-28 million barrels) and Brent (-1 million) but buyers of U.S. gasoline (+11 million) and U.S. diesel (+2 million) with little change in European gasoil (-0.5 million).
For the most part, the wave of selling that started on or shortly after Jan. 7 seems to have been completed by the early part of last week, with oil traders anticipating a global slowdown, but not a recession.
Fund managers trimmed their combined long positions by 19 million barrels last week, but they also reduced short positions by 3 million barrels, indicating some short sellers started to buy back their positions.
The ratio of money manager long to short positions edged down to 2.61 from 2.64 the previous week, closing in on the recent lows set in October (2.57) and January (1.84) last year.
The bullishness which characterised the hedge fund community at the end of 2019 had been almost entirely wiped out and replaced with a strong bearish bias.
From a positioning perspective, the distribution of risks has switched to the upside, with more scope for bullish long-building than further bearish selling.
From a fundamental perspective, however, the risk distribution appears more symmetrical, with growing concern about the spread of coronavirus outside China, and its potential to trigger a longer and deeper global economic slowdown, matched by hopes for a faster rebound if business activity starts to return to normal.
Signs of coronavirus transmission outside China, including in Italy, Iran and South Korea, have since rattled financial markets, as they suggest containment efforts may not be entirely effective.
If coronavirus cannot be contained within Hubei/China, policymakers, businesses and individuals in the rest of the world, will face tough decisions on how far and how long to maintain quarantine, isolation and social distancing measures that aim to reduce transmission and mortality, but impose a cost in terms of disrupted commercial and social activity.
Source: Reuters (Editing by Barbara Lewis)