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Hedge Fund Oil Bulls
Switch to Buying Brent

(Reuters) – Hedge funds continued to buy petroleum last week, extending a six-week buying cycle on expectations that the oil industry has now moved through the worst point in the crisis brought on by the volume war and pandemic.

Hedge funds and other money managers purchased a further 35 million barrels in the six most important petroleum futures and options contacts in the week to May 5, according to regulatory and exchange data.

Portfolio managers have now bought a total of 281 million barrels since March 24, having previously sold 688 million barrels from the start of the year.

In a continuation of the pattern evident in recent weeks, last week’s purchases were concentrated in crude (+36 million barrels) with no significant buying or selling in refined fuels such as gasoline and middle distillates.

But in a break with the recent pattern, the crude buying focused on Brent (+34 million barrels) rather than WTI (+2 million), which likely reflected a degree of catching up.

One week earlier, fund managers held more than 5 bullish long positions for every short one in WTI, but the equivalent ratio in Brent was just 2.5 to 1.

By April 28, fund positioning in WTI had started to appear fairly stretched, and vulnerable to a sudden reversal, while positioning in Brent looked less fragile.

For crude oil bulls, Brent had started to look like a less risky bet, which probably explains the rotation of buying into the contract.

By the close of business on May 5, following the wave of Brent buying, the ratios in WTI and Brent stood at 5.30 to 1 and 3.42 to 1 respectively.

Overall, recent portfolio changes suggest funds think the worst is over in crude market, with producers slashing output. However, it will take more time to digest, for fuel consumption to normalise and excess stocks to be absorbed.

Editor’s Note: Reporting by John Kemp, Senior Market Analyst, Commodities and Energy, Reuters.

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