17 September 2018, London — Hedge fund managers have remained bullish towards Brent even as the approach of Hurricane Florence turned them against WTI and refined fuels were hit by liquidation.
Hedge funds and other money managers cut their combined net long position in the six most important petroleum futures and options contracts by 29 million barrels in the week to Sept. 11.
The reduction in net length was a notable reversal after portfolio managers had boosted their bullish position by a total of 172 million barrels over the two previous weeks.
For the third week running, fund managers added to their net long position in Brent, raising it by another 23 million barrels last week and by a total of 116 million since Aug. 21.
But that was more than offset by reductions in NYMEX and ICE WTI (-28 million barrels), U.S. gasoline (-8 million), U.S. heating oil (-6 million) and European gasoil (-11 million).
The liquidation of WTI positions is likely to have been encouraged by the approach Hurricane Florence and more generally by the peaking of the tropical cyclone season in the North Atlantic and the Gulf of Mexico.
Florence was already clearly tracking towards the Atlantic coast, an area of net petroleum consumption, where it ultimately made landfall, rather than the production and refining centres on the Gulf Coast.
However, concerns about the risk of other storms, coupled with memories of last year’s Hurricane Harvey, which put multiple refineries out of action for several weeks in 2017, appear to have encouraged caution.
Rising inventories of both gasoline and middle distillates, after an unusually long and heavy summer refining season, have inspired a similar restraint towards fuels.
In contrast, sentiment towards Brent remained positive, as traders focused on the loss of exports from Iran as a result of U.S. sanctions as well as a levelling off in U.S. shale production and strong consumption growth.
Fund managers have become more cautious towards the entire petroleum complex since the first quarter, reducing gross long positions across the six contracts to just 1.159 billion barrels, from a peak of 1.625 billion in January.
But hedge funds’ short positions remain close to multi-year lows, at just 113 million barrels, suggesting few managers are willing to bet on the possibility of a significant pull back in either crude or fuel prices.
Positioning is still lopsided, with fund managers holding 10 bullish long positions for every bearish short position, down from a ratio of almost 14:1 in April but sharply up from just 4:1 a year ago.
Overall, the hedge fund community is still anticipating a further rise in oil prices, even as they touch the highest level for almost four years.