Investors have become super-bullish about oil

A general view of Equinor's Johan Sverdrup oilfield platforms in the North Sea, Norway, Dec 3, 2019. REUTERS

Portfolio investors have piled into petroleum futures and options at the fastest rate since the first successful coronavirus vaccines were announced in late 2020.

China’s exit from a zero-COVID strategy, along with hopes the global economy can avoid a recession and low oil inventories, have contributed to an extraordinary wave of buying across the petroleum complex.

Hedge funds and other money managers purchased the equivalent of 232 million barrels in the six most important futures and options contracts over the six weeks ended Jan 24.

Purchases were the fastest for any six-week period since December 2020, according to an analysis of position records published by ICE Futures Europe and the US Commodity Futures Trading Commission.

In the most recent week, fund managers purchased the equivalent of 70 million barrels, mostly in Brent (+40 million) and to a much lesser extent NYMEX and ICE WTI (+4 million).

But the wave of buying spread beyond crude to encompass U.S. gasoline (+11 million barrels), US diesel (+8 million) and European gas oil (+7 million).

Refinery shutdowns linked to seasonal maintenance as well as sanctions on Russia’s diesel exports are expected to deplete fuel inventories further.

The net position across all six contracts climbed to 575 million barrels (47th percentile for all weeks since 2013), up from 343 million barrels (11th percentile) on Dec 13.

The net position is at highest since Nov. 8 and before that June 14.

There was a strongly bullish orientation, with long positions outnumbering short ones by a ratio of 5.93:1 (80th percentile) up from 2.58:1 (23rd percentile) five weeks earlier.

The most bullish ratios are concentrated in Brent (86th percentile), US gasoline (85th percentile) and US diesel (86th percentile), with less optimism about European gas oil (65th percentile) and WTI (41st percentile).

Refinery maintenance in the United States is expected to deplete fuel inventories there but leave WTI prices trailing Brent, which probably explains the differential performance.

Hedge funds became more bullish about Brent than at any time since May 2019, before the pandemic erupted and upended the oil industry.

There is a growing tension at the heart of investor positioning.

In the bond market, investors are increasingly confident inflation will moderate, allowing central banks to bring an early end to interest rate rises.

In the oil market, investors are increasingly sure continued growth will cause supplies to tighten and send prices higher.

But that would be inflationary – and contradicts to the benign outlook assumed by the bond market.

Oil traders and bond traders cannot both be right.

John Kemp is a Reuters market analyst. The views expressed are his own.