Hedge funds and other money managers sold the equivalent of 28 million barrels in the six most important petroleum-related futures and options contracts in the week to Nov. 23.
Funds sold petroleum in six of the most recent seven weeks, reducing their combined position by a total of 162 million barrels, according to exchange and regulatory data (https://tmsnrt.rs/32MRtuv).
The most recent week saw widespread selling in Brent (-10 million barrels), NYMEX and ICE WTI (-3 million), European gas oil (-11 million) and U.S. diesel (-5 million) with small buying only in U.S. gasoline (+1 million).
The combined position across all six contracts was cut to 709 million barrels (62nd percentile for all weeks since 2013), down from 871 million barrels (79th percentile) at the start of October.
Bullish long positions outnumbered bearish short ones by a ratio of 4.75:1 (62nd percentile) down from 6.76:1 (84th percentile) seven weeks earlier.
Even before news of the Omicron variant, bullish positioning had been sapped by the prospect of a release of emergency oil stocks, forecasts of higher U.S. shale output, inflation concerns and profit-taking after a big rally.
News about the new variant and restrictions on international passenger aviation therefore arrived in a market already under pressure with an absence of short-term speculative buyers.
Omicron news landed into a liquidity hole caused by the pre-existing downward price trend and the fact many traders were still away from the office after the U.S. Thanksgiving holiday the day before.
Lack of liquidity created conditions for a classic flash crash, with adverse fundamental news interacting with market positioning to create an exaggerated downward slump in prices.
Brent’s front-month futures contract fell by more than 11% on Nov. 26. The one-day decline was almost five standard deviations away from the mean and the ninth-largest fall out of 8,148 days since the start of 1990.
Following fund sales and the price slump, positions are now broadly neutral and prices are close to their long-term inflation-adjusted average, with the likelihood of further price falls or a renewed rise roughly equal.