(John Kemp is a market analyst at Reuters. The opinions expressed are his own)
* Chartbook: https://tmsnrt.rs/3vJIZhP
LONDON, March 22 (Reuters) – Oil hedge fund positioning had become directionless as last week’s sell-off approached, after a four-month rally since announcing the first successful COVID-19 vaccines in early November.
Hedge funds and other fund managers bought the equivalent of just 12 million barrels in the six largest oil futures and options contracts in the week to March 16.
The combined position (913 million barrels) was virtually indistinguishable from the position four weeks earlier on February 16 (904 million barrels), according to records released by exchanges and regulators.
By contrast, positions had climbed 548 million barrels over the previous 15 weeks, averaging over 36 million barrels per week (https://tmsnrt.rs/3vJIZhP).
New fund purchases appear to have dried up when first month Brent futures prices soared above $ 65 a barrel ?? a level which has been sufficient to increase US shale production over the past decade.
The most recent week saw small-scale purchases in NYMEX and ICE WTI (+3 million barrels), US gasoline (+7 million), US diesel (+3 million) and European diesel (+5 million) but minor sales in Brent (-6 million).
Between early November and mid-February, hedge fund purchases accelerated, and probably exaggerated, the recovery in prices, anticipating a reopening of companies in the service sector and a resumption of international air travel.
However, once prices broke through the mid-1960s, the risk of overshooting increased, which limited further buying and ultimately created the conditions for a short-term correction, which occurred. later last week.
Over the past 10 years, shale production in the United States has steadily increased when prices are well above $ 60 per barrel, and has captured market share in OPEC when prices are above $ 65.
A sign of recovery in the US shale industry, the number of oil rigs in the United States has already risen to 318, down from just 172 in August.
The current increase in drilling follows a broadly similar trajectory to the resumption of drilling activity after the troughs of May 2016 and May 2009.
Prices between $ 70 and $ 80 would likely have accelerated the resumption of drilling even more, threatening to erode OPEC + ‘s market share later in 2021 and especially in 2022, making prices very volatile in that range.
At the same time, the slow progress of coronavirus vaccinations and the increase in the number of infections in Europe threaten to delay the reopening of international air travel in the second half of 2021, slowing the expected recovery in jet fuel consumption.
With production rising, consumption lower and no new purchases of funds to stabilize the market, oil prices were ready for a correction ?? which arrived with a 7% drop in one day on March 18.
– Hedge funds remain bullish as OPEC + supports oil
– Changes in the positioning of hedge funds pending a peak in oil prices (Reuters, March 8)
– Hedge funds sell oil as bull run stutters
– Fund purchases from oil stalls after prices surpass $ 60 (Reuters, February 22) (Report by John Kemp; edited by Susan Fenton)