Column: OPEC+ cuts attract funds back to oil market

LONDON, Oct 17 (Reuters) – Portfolio investors continued strong buying of crude oil futures and options for a second week after OPEC+ cut its production target more than expected.

Hedge funds and other money managers bought the equivalent of 47 million barrels of oil-related futures and options in the week ended Oct. 11.

The purchases came after OPEC+ announced on October 5 that the group would cut its combined production target by 2 million barrels per day from November.

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They tracked purchases of 62 million barrels the week before as OPEC+ officials began alerting traders to the likelihood of a large cut.

Chartbook: CFTC and ICE Commitments of Traders

The combined position of all six contracts is up 109 million barrels over the past two weeks after being reduced by a total of 237 million barrels in the 16 weeks since mid-June.

For the past week, most buying has been focused on Crude Oil (+36m barrels), with strong buying in NYMEX and ICE WTI (+20m) and Brent (+16m).

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There was also strong buying of middle distillates (+14m barrels), including European gasoil (+7m) and US diesel (+6m), but US gasoline sales (-3m).


Curbing the outflow of hedge fund money and persuading some managers to reinvest was likely one of the reasons OPEC+ aggressively lowered production targets.

OPEC+ succeeded in this goal, but at the cost of strong US criticism from Saudi Arabia, the group’s de facto leader and key decision-maker.

Overall hedge fund positions in crude oil have risen to 396 million barrels (25th percentile for all weeks since 2013) from a low of 314 million (10th percentile) on Sept. 27.

The Funds are also becoming more bullish on middle distillates as concerns about low inventories and a lack of refining capacity outweigh fears of a recession-induced demand slump.

Total middle distillate inventories have risen to 70 million barrels (58th percentile) from a low of 45 million (40th percentile) two weeks ago.

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Bullish long positions now outweigh bearish short positions in distillates at a ratio of 4.90:1 (76th percentile) versus 2.35:1 (45th percentile).

Distillates are the most economically sensitive part of the oil market as most diesel and gas oil is used in manufacturing, freight transport, agriculture, mining and oil and gas exploration.

But fund managers have become more optimistic about the outlook for distillate prices even as the economic outlook has deteriorated.

Global distillate inventories are at multi-decade lows and there is not enough refining capacity to replenish them unless a recession leads to a significant drop in consumption.

Investors appear to be betting that distillate shortages will worsen in the near term before a possible recession eases later in 2023.

Related columns:

– Diesel’s dire message for the global economy (Reuters, Oct. 14)

– OPEC+ cut pulls hedge funds back into oil market (Reuters, Oct. 10)

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– Oil investors poised for recession (Reuters, October 3)

– Hedge funds dump distillates as recession risks mount (Reuters 26 Sept)

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

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Editing by David Evans

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias under the Trust Principles.

John Kemp

Thomson Reuters

John Kemp is a senior market analyst specializing in oil and power systems. Before joining Reuters in 2008, he was a trade analyst at Sempra Commodities, now part of JPMorgan, and an economic analyst at Oxford Analytica. His interests span all aspects of energy technology, history, diplomacy, derivatives markets, risk management, politics and transitions.


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