LONDON, Jan 31 – Portfolio investors took some profits last week after a blistering rally in oil prices since the start of December left the market looking increasingly overheated in the short term.
Source: Reuters
Hedge funds and other money managers sold the equivalent of 18 million barrels in the six most important petroleum-related futures and options contracts in the week to Jan. 25 (https://tmsnrt.rs/3rYYtNI).
The sales came after the fund community had purchased the equivalent of 217 million barrels over the previous five weeks and Brent prices had climbed more than $17 per barrel, or 25%, in under two months.
Most of the adjustment came from sales of previous bullish long positions (-17 million barrels) rather than initiation of new bearish shorts (+2 million) confirming it was likely driven by profit-taking.
Sales were led by NYMEX and ICE WTI (-20 million barrels) and to a lesser extent Brent (-5 million) and U.S. gasoline (-1 million), partially offset by purchases of U.S. diesel (+4 million) and European gas oil (+5 million).
Prior to the selloff, WTI appeared the most overheated part of the market, with long positions outnumbering shorts by more than 9:1 (89th percentile for all weeks since 2013) compared with less than 5:1 for Brent (51st percentile).
Profit-taking was small-scale, and investors are still overwhelmingly bullish towards oil, with a net long position of 743 million barrels across all six contracts (67th percentile) and long positions outnumbering shorts by 6:1 (79th percentile).
Global petroleum inventories are below the pre-pandemic five-year average and expected to tighten further as the economy continues to recover from the pandemic-linked recession and international passenger aviation resumes.
Six-month backwardations in both Brent and WTI futures are among the most severe for a third of a century, consistent with traders expecting low and falling inventories.
However, with prices and spreads having risen so much in such a short space of time, and concerns about inflation clouding the economic outlook, at least some fund managers decided to realise some profits.
