Hedge Funds Turn Bearish on Petroleum Prices

Portfolio investors have become pessimistic about petroleum prices due to unexpectedly stable inventories. Hedge funds sold off significant futures over the past three weeks, leading to a substantial reduction in net positions. Ample inventories and high interest rates have further dampened bullish sentiment among traders, causing a retreat in spot prices.

Portfolio investors have grown increasingly pessimistic about the future of petroleum prices, as a large expected depletion of inventories has yet to occur.

Hedge funds and other financial managers sold off the equivalent of 103 million barrels in six major futures and options contracts over the week ending July 23. In total, 144 million barrels were sold in the last three weeks, according to ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

This sell-off has slashed the net position of funds to just 380 million barrels, down from a recent high of 524 million barrels on July 2. Significant sales were recorded in Brent, NYMEX and ICE WTI, European gas oil, along with U.S. gasoline and diesel.

Despite the peak summer consumption season, which is now beyond its midpoint, only a modest depletion of inventories has taken place. U.S. stocks of crude oil and refined fuels have remained close to long-term seasonal averages, dampening trader optimism and leading to a retreat in spot prices, calendar spreads, and crack spreads.

Funds remain neutral or mildly bearish about U.S. crude but have turned very bearish on Brent and refined fuels. The anticipated recovery in manufacturing in North America, Europe, and China has faltered since April, exacerbated by high interest rates that dissuade purchases of durable goods.

Moreover, signs indicate that the post-pandemic surge in travel and tourism may have peaked, pressured by high prices and cost-of-living increases. The anticipated decline in global petroleum inventories has been deferred multiple times this year, and it appears delayed yet again.

On the U.S. natural gas front, investors bought futures and options for the first time in five weeks. Hedge funds purchased 151 billion cubic feet of futures linked to gas prices at Henry Hub, Louisiana, over the week ending July 23. Small-scale buying ensued after four weeks of significant selling, reflecting a cautious recovery.

Despite high demand due to above-average temperatures, working gas inventories remain above seasonal averages, with stocks starting the winter season higher than expected. The persistent surplus has driven front-month futures prices to exceptionally low levels, prompting some fund managers to repurchase previous bearish short positions.

Overall, the hedge fund community remains cautious about any potential rebound from the current low price levels.