Oil bulls lack conviction about sustainability of higher prices

Investors boosted their exposure to Brent as the conflict between Iran and Israel escalated but there was selling across the rest of the petroleum complex amid doubts about the sustainability of higher prices.

Hedge funds and other money managers sold the equivalent of 23 million barrels in the six most important petroleum futures and options contracts over the seven days ending on April 16.

Purchases of Brent (+31 million barrels) were more than offset by sales of NYMEX and ICE WTI (-35 million), US gasoline (-5 million), US diesel (-5 million) and European gas oil (-9 million).

Brent is most exposed to production and shipping disruptions as a result of conflict in the Middle East and fund managers boosted their net position to 335 million barrels (75th percentile for all weeks since 2013).

But much of this additional exposure seems to have rotated out from WTI, where funds sold at the fastest rate for 10 weeks and the net position was trimmed to just 183 million barrels (31st percentile).

While fund managers had become strongly bullish on Brent they were increasingly bearish about prospects for WTI.

In the premier NYMEX WTI contract, there was evidence of a fresh cycle of short selling, which had started four weeks earlier when prices climbed above $80 per barrel.

Fund managers had boosted short positions equivalent to 71 million barrels by April 16, up from 23 million on March 19.

In refined fuels, previous bullishness about a continued depletion of inventories and a further rise in prices had also started to ebb away.

The hedge fund community is broadly bullish about the outlook for both crude and fuel prices but not with much conviction.

Bullish long positions outnumber bearish short ones by a ratio of 3.60:1 which is in only the 42nd percentile for all weeks since 2013.

There are upside risks from Middle East conflict, production restraint by Saudi Arabia and its OPEC+ allies, and a cyclical economic upswing in the United States

But these are offset by downside risks from strong growth in non-OPEC output, persistent inflation, higher-for-longer interest rates, and a desultory economic recovery in Europe and China.

Escalating conflict between Israel and Iran has masked a slight deterioration of investor sentiment about the outlook for oil prices in recent weeks.

Once the conflict appeared to have been contained, with Israel’s limited retaliation against Iran, prices have retreated.

US NATURAL GAS

Investors turned more bearish towards US natural gas as the seasonal inventory surplus continued to swell and stocks climbed near to a record high for the time of year.

Hedge funds and other money managers sold the equivalent of 173 billion cubic feet (bcf) in the two most important futures and options contracts linked to prices at Henry Hub in Louisiana.

The rate of selling was the fastest for eight weeks since mid-February, before some of the largest producers announced they would be scaling back drilling and production.

As a result, funds held a net short position of 483 bcf (19th percentile for all weeks since 2010) versus a net short of 310 bcf (25th percentile) the week before.

Working gas inventories amounted to 2,333 bcf on April 12, the highest for the time of year since 2016 and before that 2012.

Inventories were an enormous 641 bcf (+38% or +1.38 standard deviations) above the prior ten-year average and the surplus shows no sign so far of narrowing despite prices close to multi-decade lows in real terms.

In December, the latest month for which data is available, power generators paid the lowest seasonal prices for gas since 1974, after adjusting for inflation. Since then, the real acquisition cost has likely fallen even further.

But the warmest winter on record has depressed consumption of both gas and electricity, ensuring that inventories have remained exceptionally high and postponing any rebound in prices.