John Kemp: Oil bulls emboldened by EU sanctions and China easing lockdowns

LONDON, June 6 (Reuters) – Portfolio investors have begun to turn bullish again towards petroleum as impending EU sanctions on Russia’s exports and easing lockdowns in China outweigh fears of a possible recession in Europe and North America.

Hedge funds and other money managers purchased the equivalent of 32 million barrels in the six most important futures and options contracts in the week to May 31, according to exchange and regulatory data.

Funds have been net buyers in two of the last three weeks, increasing their position by a total of 83 million barrels (15%) since May 10, the fastest comparable increase for four months.

(Chartbook: https://tmsnrt.rs/3xlCZhV)

The latest week saw purchases across the board in Brent (+13 million barrels), NYMEX and ICE WTI (+7 million), European gas oil (+5 million), U.S. diesel (+3 million) and U.S. gasoline (+3 million).

The combined position of 631 million barrels remains moderate, in only the 53rd percentile for all weeks since 2013, but the ratio of long to short positions, at 6.54:1, displays a strongly bullish bias, in the 83rd percentile.

On the supply side, the EU has approved a sixth sanctions package, phasing out most purchases of Russian crude and products, including distillates, by the end of 2022 or early 2023, which is likely to intensify shortages of both.

On the demand side, China has eased the lockdown imposed on Shanghai, and the government’s zero-COVID strategy is being tempered by the need to support the economy, likely boosting consumption of crude and distillates.

Those bullish signals more than offset continued fears of a business cycle slowdown or an outright recession in Europe and North America.

In the United States, the most recent economic data shows growth has decelerated after last year’s exceptional post-epidemic rebound but still has considerable momentum, which will keep oil consumption high in the short term.

Fund managers increased their position in middle distillates such as diesel and gas oil by 8 million barrels, the fastest increase for 17 weeks.

Distillate inventories have continued to fall on the U.S. East Coast, reflecting the acute shortage throughout the North Atlantic basin caused by sanctions and cyclically high levels of manufacturing and freight activity.

With China’s distillate consumption likely to increase as the government boosts domestic growth, while EU sanctions hit Russia’s distillate exports especially hard, this part of the market is set to tighten even further.