London — Hedge funds’ oil trading remained very light last week as the normal summer holiday slowdown was compounded by the lack of clear signals about the future direction of the market.
In the absence of strong signals about the overall direction of prices, some hedge funds and other money managers are turning their attention to relative value plays, betting that oil products will outperform crude.
Funds purchased the equivalent of 10 million barrels in the six most important petroleum futures and options contracts in the week to August 11.
Portfolio managers were small buyers of Brent (+17 million barrels), U.S. gasoline (+5 million) and U.S. diesel (+2 million), while selling small volumes of NYMEX and ICE (-13 million) and European gasoil (-1 million).
Total positions have remained broadly unchanged since the end of June, cycling in a narrow range centred on 640-650 million barrels, putting them in the 60-62nd percentile for all trading days since 2013.
Last week’s position of 652 million barrels puts them towards the top of the recent range, but any upward trend is barely perceptible, with average purchases of less than 3 million barrels per week over the last four weeks.
The most significant trend is the continued shift towards bullish positioning in refined fuels rather than crude oil contracts.
Net positions in the three fuels contracts hit 91 million barrels last week, up from a low of just 31 million in early June, and the highest since the middle of February.
Positions in the two middle distillates contracts, in particular, have increased sharply, reaching 48 million barrels last week, up from zero at the end of May.
Middle distillates have been the most oversupplied part of the market following the coronavirus epidemic and lockdowns.
Distillate margins have fallen close to multi-year lows and are probably not sustainable at current levels in the medium term.
Distillate contracts are therefore attracting attention from portfolio managers who think prices have been so beaten down that they now offer the best relative prospects for a cyclical recovery.