By John Kemp, Senior Market Analyst
Portfolio investors turned cautious on oil again last week after a sharp burst of buying the week before, amid uncertainty about whether recession or sanctions will dominate prices over the next six months.
Hedge funds and other money managers sold the equivalent of 5 million barrels in the six most important petroleum-related futures and options contracts in the week to May 24.
Renewed sales came after investors purchased 56 million barrels the week before, the fastest buying for four months, according to data from ICE Futures Europe and the U.S. Commodity Futures Trading Commission.
In the most recent week, Brent buying (+13 million barrels) was more than offset by sales of NYMEX and ICE WTI (-8 million), U.S. gasoline (-4 million), European gas oil (-3 million) and U.S. diesel (-2 million).
The hedge fund community still has a strong bullish bias towards petroleum, with long positions outnumbering bearish short ones by a ratio of almost 6:1, in the 78th percentile for all weeks since 2013.
But their conviction remains modest, with a combined long position of only 599 million barrels, only in the 47th percentile, reflecting the conflicting risks from recession and sanctions.
Prices are already well above the long-term average in real terms, especially for refined fuels such as diesel and gasoline, increasing the risk of a reversal, while elevated volatility makes maintaining positions more expensive.
In a sign of the growing threat of an economic slowdown, funds continued to cut their positions in middle distillates such as diesel and gas oil, the most cyclically sensitive part of the petroleum market.
Fund managers have trimmed their positions in mid-distillates in 12 of the last 16 weeks by a total of 78 million barrels (54%) since the start of February, as fears of a slowdown have intensified.