Hedge funds completed the wave of crude oil futures and options sales last week but there were heavy sales of derivatives linked to middle distillates.  

Hedge funds net sellers of 649 million barrels in the last nine weeks

By John Kemp
LONDON, Dec 3 – Hedge fund managers had largely completed the recent wave of selling in crude oil futures and options by the middle of last week but there were heavy sales of derivatives linked to middle distillates.

Hedge funds and other money managers were net sellers of 41 million barrels in the six most important futures and options contracts linked to petroleum prices in the week to Nov. 27.

Funds have been net sellers of 649 million barrels in the last nine weeks, the largest reduction over a comparable period since at least 2013, when the current data series began.

But there were clear signs the wave of selling was ending, at least in crude, with combined sales in Brent and WTI of just 12 million barrels last week, the lowest weekly total since September.

Portfolio managers sold 14 million barrels of Brent, but for the second week running they bought NYMEX and ICE WTI, boosting holdings by 2 million barrels.

Managers who shorted NYMEX WTI between late August and early November covered some open positions, with shorts down to 78 million barrels from a recent peak of 94 million on Nov. 13.

As the selling pressure has eased, oil prices have stabilized, suggesting the market may have found a temporary floor around $50 for WTI and $60 for Brent.

But there were continued heavy sales of futures and options contracts linked to middle distillates such as gasoil and diesel, in a worrying sign for the global economy.

Portfolio managers were net sellers of 10 million barrels of U.S. heating oil and 19 million barrels of European gasoil in the week to Nov. 27.

Net length in U.S. heating oil has been cut to just 15 million barrels from a recent high of 63 million barrels at the start of October, while net length in European gasoil has been cut to 50 million from 112 million.

Middle distillates, which are mostly consumed in freight transportation, manufacturing, mining and farming, are normally the tightest part of the oil market at this late stage of the economic cycle.

Distillate supplies were expected to become especially tight this time with the introduction of new regulations that will force many ship owners to switch from heavy fuel oil to cleaner distillate fuel oil from the start of 2020.

But concerns about distillate availability have evaporated in recent weeks – which may reflect greater confidence about the smooth introduction of the new rules but could also reflect fears about a global economic slowdown.

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