Oil Bulls Retreat as Inventories Remain Plentiful.
Hedge funds and other money managers sold the equivalent of 103 million barrels across six major futures and options contracts during the week ending July 23. Over the past three weeks, combined sales have totaled 144 million barrels, based on records from ICE Futures Europe and the U.S. Commodity Futures Trading Commission.
As a result, net positions have been cut to just 380 million barrels (19th percentile for all weeks since 2013) from a recent high of 524 million (35th percentile) on July 2. The most recent week saw sales in Brent (-38 million barrels), NYMEX and ICE WTI (-31 million), European gas oil (-21 million), U.S. gasoline (-9 million), and U.S. diesel (-5 million).
The peak summer consumption season has passed its midpoint, and inventory depletion has been modest. U.S. stocks of crude oil and refined fuels like gasoline and diesel have remained close to long-term seasonal averages in recent weeks. Ample inventories have dampened traders’ bullish sentiment, leading to a retreat in spot prices, calendar spreads, and crack spreads.
Funds remain neutral or mildly bearish on U.S. crude but have turned very bearish on Brent and all refined fuels. The anticipated recovery in manufacturing across North America, Europe, and China has lost momentum since April. High interest rates continue to deter purchases of expensive durable goods such as new cars, home appliances, and electrical equipment. Additionally, the post-pandemic surge in travel and tourism appears to have peaked due to high prices and cost-of-living pressures on consumers.
The anticipated depletion of global petroleum inventories has been deferred multiple times this year and seems to have been postponed again.
U.S. Natural Gas
Investors have purchased futures and options linked to U.S. gas prices for the first time in five weeks as inflation-adjusted prices have dropped towards multi-year lows. Hedge funds and other money managers bought the equivalent of 151 billion cubic feet (bcf) of futures and options linked to gas prices at Henry Hub in Louisiana over the week ending July 23. This follows the sale of 980 bcf over the previous four weeks, according to futures regulator records.
Working gas inventories remain well above average for the time of year and show limited signs of normalizing after an exceptionally mild winter in 2023/24. Stocks are the second-highest on record for this time of year and are still 479 bcf (+17% or +1.35 standard deviations) above the prior 10-year seasonal average.
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The surplus has narrowed slowly despite hotter-than-normal temperatures increasing air conditioning demand, slow wind speeds, and low gas prices encouraging more gas-fired generation. As the U.S. air conditioning season has passed its midpoint, further depletion is limited, making it likely that working inventories will start the winter heating season higher than average.
The persistent surplus has caused front-month futures prices to slump to less than $2 per million British thermal units to maximize gas-fired generation and limit further stock accumulation. Adjusted for inflation, front-month prices are in only the 2nd percentile for all months since the start of the century.
Ultra-low prices have tempted some fund managers to book profits by repurchasing previous bearish short positions, with short covering accounting for two-thirds of all buying in the most recent week. However, the hedge fund community remains very cautious about the potential for a rebound, even from the current exceptionally low price level. Fund managers held a net position of just 341 bcf in the two major contracts, in only the 42nd percentile for all weeks since 2010.
