LONDON (Reuters) – Hedge funds started to become more bullish on the outlook for oil last week amid rising hopes a successful coronavirus vaccination program will enable the early resumption of business activity and air travel.
Hedge funds and other money managers purchased the equivalent of 69 million barrels in the six most important petroleum futures and options contracts in the week ending on Nov. 17, according to exchange position data.
Portfolio managers have now purchased a total of 182 million barrels in the two most recent weeks, taking their total position in the six contracts to 539 million, the highest it has been since the start of September.
Last week’s purchases mostly consisted of the creation of new bullish long positions, in contrast to the week before, when buying was driven by the need to close out old bearish short positions.
Buying was focused on Brent (+51 million barrels) but there were purchases across the board including NYMEX and ICE WTI (+3 million), U.S. gasoline (+7 million), U.S. diesel (+1 million) and European gasoil (+6 million).
Fund managers have become much less bearish and more bullish towards crude and fuel prices, as hopes for a vaccine-driven rebound in oil consumption rise, but the shift started from a very low and pessimistic base.
Even after the recent bout of buying, the hedge fund community’s net position in crude was still only in the 44th percentile for all weeks since the start of 2013, while the net position in products was in the 48th percentile.
Crude positions had risen only back to where they were four weeks previously and were still well below where they stood at the end of the second quarter and the start of the third (tmsnrt.rs/371Dtv7).
That suggests there is still a lot of scope for fund managers to increase their bullish positioning if news about vaccine trials and deployment remains encouraging.
Brent spot prices and calendar spreads have continued to strengthen in recent days, suggesting more buying has probably entered the market since the positions were reported at the end of last Tuesday.
Fund buying will accelerate and possibly amplify the rise in prices as the market anticipates an improvement in the consumption outlook in 2021.
The main danger is that traders’ are over-estimating the speed at which successful vaccine trials can be turned into community-wide immunizations and a resumption of normal business and international aviation.
For now the balance of price risk is probably still tilted to the upside, with potential for more position-building in the short term.
But prices will become increasingly vulnerable to an interim correction if market participants become less optimistic about the timeline and its impact on oil demand.