October 26, 2023 [Reuters]- Portfolio investors tiptoed back into the petroleum market last week, after three weeks of heavy selling, as conflict in the Middle East threatened to disrupt crude oil supplies.
Hedge funds and other money managers purchased the equivalent of 10 million barrels across the six most important futures and options contracts over the seven days ending on Oct. 17.
The buying came after managers sold a total of 197 million barrels over the previous three weeks, according to records filed with ICE Futures Europe and the U.S. Commodity Futures Trading Commission.
On the crude side, the most recent week saw a major rotation from NYMEX and ICE WTI (-57 million barrels) into Brent (+74 million barrels).
The threat from a squeeze on Cushing inventories diminished (reducing interest in WTI), while investors focused instead on possible disruption of crude supplies from the Middle East (boosting interest in Brent).
Brent buying was the largest in any single week for almost seven years since the original declaration of cooperation between OPEC and non-OPEC exporters was announced in December 2016.
In consequence, the net position in NYMEX and ICE WTI dropped below Brent for the first time in six weeks since early September.
The net position in WTI fell to 183 million barrels (29th percentile for all weeks since 2013) from 286 million (60th percentile) three weeks earlier.
Meanwhile, the net position in Brent surged to 227 million barrels (48th percentile) from 153 million (20th percentile) the week before.
On the product side, the recent trend continued with sales of U.S. gasoline (-7 million barrels) and European gas oil (-4 million) partially offset by purchases of U.S. diesel (+4 million).
U.S. diesel inventories are well below average for the time of year and the incipient recovery in manufacturing and freight activity is likely to deplete them even further.
By contrast, Europe’s manufacturing sector is expected to remain depressed, while U.S. gasoline inventories are set to accumulate as a co-product of making more diesel.
Net positions in U.S. gasoline (18th percentile) and European gas oil (24th percentile) are very low compared with U.S. diesel (84th percentile).
U.S. NATURAL GAS
Investors turned more cautious again on the outlook for U.S. gas prices as the short covering rally of the previous two weeks petered out and renewed selling emerged.
Hedge funds and other money managers sold the equivalent of 240 billion cubic feet (bcf) of gas in the seven days ending on Oct. 17 after purchasing a total of 1,048 bcf over the two prior weeks.
The net position edged down to 535 bcf (44th percentile) from 779 bcf (49th percentile) a week earlier.
Despite very low prices in real terms, which should stimulate consumption by power generators, working gas inventories are no longer falling compared with the prior ten-year seasonal average.
Inventories were 79 bcf (+2% or +0.30 standard deviations) above the average, up from a surplus of 60 bcf (+2% or +0.23 standard deviations) a week earlier.
The surplus stopped narrowing after coming in from 299 bcf (+12% or +0.81 standard deviations) at the end of June.
The result has been an abrupt end to the rise in prices, with the futures contract for delivery in December 2023 down to $3.26 per million British thermal units on Oct. 20 from a high of $3.66 on Oct. 10.
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