Investors have become less bearish about the outlook for oil and gas prices as U.S. shale producers scale back drilling while Saudi Arabia and its OPEC+ allies extend their own output cuts for a further three months.
Hedge funds and other money managers purchased the equivalent of 10 million barrels in the six most important petroleum futures and options contracts over the seven days ending Feb. 27.
Fund managers have purchased petroleum in eight of the most recent 11 weeks, buying a total of 325 million barrels since Dec. 12, according to records filed with regulators.
As a result, the combined position had been raised to 532 million barrels (41st percentile for all weeks since 2013), up from 207 million barrels (1st percentile) on Dec. 12.
The most significant transformation has been in NYMEX and ICE WTI, where the position had been lifted to 144 million barrels (14th percentile), up from a record low of 31 million.
Short positions in NYMEX WTI anticipating a further decline in prices have been slashed by more than two-thirds to 40 million barrels from 128 million.
Persistent short-covering has helped lift front-month WTI prices by more than $10 per barrel (15%) since mid-December.
Some of the gap, where fund managers were relatively sanguine about the outlook for Brent but extremely bearish towards WTI, has now closed.
Funds are still fairly bearish on WTI; neutral about Brent and European gas oil; and bullish towards U.S. diesel and gasoline.
Investors anticipate shale production growth will slow, while Saudi Arabia and its OPEC+ allies will continue to restrict their own output to deplete crude inventories and drive prices higher.
On the fuel side, consumption is expected to increase as the major economies recover from a mid-cycle slowdown in 2022/23, but with the strongest recovery in the U.S., where fuel inventories are already well below average.
U.S. NATURAL GAS
Some of the extreme bearishness towards U.S. gas prices has begun to dissipate after major producers announced cuts to drilling programmes in response to prices at a multi-decade lows in real terms.
Hedge funds and other money managers purchased the equivalent of 508 billion cubic feet (bcf) in the two major futures and options contracts linked to prices at Henry Hub in Louisiana in the seven days to Feb. 27.
The purchases reversed some of the 2,085 bcf sold over the previous five weeks, according to records published by the U.S. Commodity Futures Trading Commission.
All the buying came in the form of repurchasing previous short positions (+542 bcf) after massive short selling in the previous five weeks (-2,369 bcf).
In consequence, funds increased their position to a net short of 1,167 bcf (6th percentile for all weeks since 2010) from a net short of 1,675 bcf (2nd percentile) the prior week.
Bearish short positions still outnumbered bullish long positions by 1.38:1, but the ratio had fallen from 1.55:1 the previous week.
U.S. gas inventories were 461 bcf (+24% or +1.25 standard deviations) above the prior ten-year seasonal average on Feb. 23, up from a surplus of just 64 bcf (+2% or +0.24 standard deviations) at the start of winter.
But with prices at the lowest level in real terms for more than three decades, and a huge concentration of short positions that have to be repurchased, the balance of risks lies firmly to the upside.
Production and drilling cuts announced by several major producers acted as the catalyst for a bout of short covering that has started to lever prices up from the mid-February low.
