London — Hedge funds continued buying oil last week, but the focus switched from crude to previously-neglected refined products, where cautious positioning and very low refinery margins may offer more upside potential.
Hedge funds and other money managers purchased 28 million barrels in the six most important petroleum futures and options contracts in the week to July 21, adding to 24 million barrels of buying the week before.
Portfolio managers have now bought petroleum in 14 out of the last 17 weeks, increasing their position by a total of 388 million barrels since the end of March, though the rate of purchases has slowed recently.
Last week’s buying was concentrated in U.S. gasoline (+7 million barrels), U.S. diesel (+4 million) and European gasoil (+9 million) with only small purchases in Brent (+3 million) and NYMEX and ICE WTI (+5 million).
For the last three months, buying has concentrated on crude, responding to sharp output cuts by U.S. shale producers as well as by OPEC and its partners in the wider OPEC+ alliance.
By contrast, fund interest in oil products has been limited as refiners struggle to eliminate excess inventories built up during the lockdowns in April and May.
By the middle of July, bullish hedge fund positions in crude outnumbered bearish ones by a ratio of more than 5:1 compared with less than 3:1 for gasoline and less than 2:1 for distillates.
The net position in crude (588 million barrels) was in the 68th percentile for all weeks since 2013 while the net position in products (82 million barrels) was only in the 47th percentile, revealing the clear bias towards crude.
But with crude producers now relaxing some of their previous output cuts, and refiners showing signs of limiting throughput to work down product stocks, some fund managers appear to be rotating from crude to fuels.
Given the extreme uncertainty about the economic recovery and oil consumption following the first wave of the pandemic, portfolio managers are focusing on relative value rather than absolute value plays.
From a positioning perspective, fuels seem to offer more upside, and less downside, than crude over the next few months, prompting a shift in focus.
- John Kemp, Reuters his own.