February 16, 2024 [Reuters]- Portfolio investors abandoned hope for an early rally in crude prices after a site-wide electricity failure caused an unexpected shutdown in production at BP’s (BP.L), opens new tab refinery at Whiting in Indiana on Feb. 1.

The refinery is the largest in the U.S. Midwest and processes more than 400,000 barrels per day, so the extended closure for safety checks and restart processes threatens to reduce crude consumption significantly.

Surplus crude is likely to accumulate across the Midwest and especially around the NYMEX delivery point at Cushing in Oklahoma.

Before the power failure, Cushing inventories had been depleting, and investors were positioning for a squeeze on deliverable supplies.

The prospect of a squeeze had been lifting prices for both U.S. crude and Brent, but the outage has delayed further depletion and sent prices sliding.

Hedge funds and other money managers sold the equivalent of 86 million barrels in the six most important petroleum-related futures and options contracts over the seven days ending on Feb. 6.

There were heavy sales of NYMEX and ICE WTI (-62 million barrels) and Brent (-23 million) as fund managers anticipated a significant increase in the amount of crude available.

Funds sold WTI at the fastest rate since October 2023 and before that July 2021 as the prospect of a squeeze receded.

The combined position in WTI was cut to a three-week low of 55 million barrels (4th percentile for all weeks since 2013) down from 117 million barrels (16th percentile) the previous week.

Fund managers had been trying to become bullish again about WTI since the middle of January on the prospect of sustained inventory depletion and renewed growth in U.S. manufacturing.

But the Whiting power failure has pushed that scenario back by at least several weeks.

REFINED FUELS

Fund managers were big buyers of European gas oil (+17 million barrels) even as they sold U.S. diesel (-7 million) and gasoline (-11 million).

Funds have become progressively less bearish about gasoil amid signs Europe’s industrial recession is nearing an end and the disruption of east-west trade because of attacks on shipping in the Red Sea.

The net long position in gasoil futures and options increased to 50 million barrels (57th percentile) up from 1 million (9th percentile) on Dec. 12.

Bullish long positions outnumbered bearish shorts by a ratio of 2.24:1 (32nd percentile) up from 1.02:1 (9th percentile) eight weeks earlier.

Interestingly, the disruption of fuel production at Whiting did not prompt fresh buying of U.S. gasoline and diesel futures.

Instead, fund managers realised profits on previous bullish long positions after a period when investors had been bullish on the outlook for U.S. fuels.

U.S. NATURAL GAS

Portfolio investors despaired of an early rebalancing of the U.S. gas market as mild weather returned and surplus gas stocks swelled further.

Hedge funds and other money managers sold the equivalent of 401 billion cubic feet (bcf) in the two major futures and options contracts linked to the price of gas at Henry Hub in Louisiana.

Funds have been net sellers for three consecutive weeks reducing their position by a total of 1,296 bcf since Jan. 16.

In consequence, fund managers held a net short position of 885 bcf (10th percentile for all weeks since 2010) down from a net long of 410 bcf (42nd percentile) three weeks earlier.

This is the third time since the middle of 2023 fund managers have tried to build a bullish position only to be forced to retreat as inventories remained above average.

Working gas inventories were 239 bcf (+10% or +0.77 standard deviations) above the 10-year seasonal average on Feb. 2 up from a surplus of 64 bcf (+2% or +0.24 standard deviations) at the start of the heating season on Oct. 1.

Front-month futures have averaged just $1.97 per million British thermal units so far in February, the lowest for more than three decades, once inflation is taken into account.

Prices are sending the strongest possible signal that production needs to slow and to encourage more consumption by power producers to eliminate excess inventories.

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