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Fund Positioning Suggests More Price Misery for Consumers

By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia

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Fund Positioning Suggests More Price Misery for Consumers
 
Harry Altham
Energy Analyst, EMEA & Asia
harry.altham@stonex.com

The oil complex is pushing higher after a volatile day yesterday, with WTI futures encountering resistance at $120 before closing below $115; the benchmark is above $116 as of 09:30BST. The European Union embargo on Russian seaborne oil continues to weigh heavily on markets, although yesterday evening’s selloff was brought about after reports that OPEC+ is considering exempting Russia from its quota system, which could allow Gulf nations to pump more crude to fulfil those allocations. This was supported by news that Russia increased production by 142k bbd despite the war in Ukraine, with the rise attributable to strong domestic demand. The U.S. is expected to ramp up diplomatic efforts to encourage Saudi Arabia to pump more oil this month; efforts thus far by Western nations have been to no avail. 

 
DEC/Dec spreads reach record backwardation
The WTI Dec/Dec spread surged to an all-time record backwardation of $16.87 yesterday as supply concerns continue to dominate market sentiment. There was further bullishness stemming from Libya, where a ‘delay in budgets’ has resulted in under-investment in the maintenance of pipelines with a major leak reported in the Sarir-Hariga pipeline, shuttering 220k bbd of production. This comes one day after Libya estimated its production for June at 633k bbd, or 44% down versus February production levels; we await details on how long the outage is expected to last and the impact it will have on total Libyan output for June.
image 39232
Monthly Chart. Source: Bloomberg, StoneX
Iran oil tanker dispute threatens nuclear deal progress
Prospects for Iran to re-enter the global oil-market fray have taken a hit after a spat with Greece has resulted in widespread international criticism of the Iranian government. Last week, Greece seized a Russian-registered tanker carrying sanctioned Iranian crude, to which Iran responded by seizing two Greek tankers in the Persian Gulf on Monday in a move that has angered the West. Furthermore, the International Atomic Energy Agency’s (IAEA) atomic monitors reported a sharp increase in Iranian stockpiles of enriched uranium, which could see Iran censured for its activity at an IAEA summit next month. Iran has said it could export 1M bbd of crude oil to Europe at short notice should sanctions be lifted; this would replace around 30% of the oil Europe expects to have lost from Russia. It should be considered extremely unlikely that there will be significant progress on nuclear talks in the wake of these developments, despite a recent visit by E.U. envoy Enrique Mora to Tehran. That recent hopes of a deal appear to be over serves to underscore the difficulty that Europe faces in finding alternative sources of oil to Russian crude, and the lack of a deal will maintain the fundamental tightness seen in markets across the last few months. 
fund positioning suggests consumers face more price pressure at the pump
Bullish sentiment across energy commodities has remained strong throughout the month of May, as the major oil benchmarks saw a sixth consecutive monthly gain amid continued tightness within petroleum markets. The ratio of the managed money net position to total managed money open interest in the Commitment of Traders Futures and Options report gives us an indication of how speculators are positioned within markets, and their outlook moving forward. We believe a net long above 70% constitutes extremely bullish market sentiment and a 30%-70% net long signifies a bullish outlook (the corresponding negative figures for net shorts represent consensus extremely bearish and bearish respectively). If we combine speculative positions across Brent and WTI, we can see that funds’ net long has risen above 70% in oil for both of the last two weeks. This leads us to believe that money managers are considerably bullish on oil at present – particularly so in WTI. At 87.71% long (27TH May), current net positions are 1.19 standard deviations above an 18-month mean of 80.77%   demonstrating a strong consensus that markets could move higher in the coming days and weeks. In fact, excluding the previous week (90.30% net long) managed money has only been more long on three occasions in that time (consecutive weeks in June 2021). We believe the positioning of hedge funds adds weight to the argument that tightening fundamentals will push oil higher in the coming weeks and will translate into fresh record retail fuel prices for already-squeezed consumers. However, it also means that when the trend turns, there could be a seismic selloff. 
image 39233
Source: ICE, CFTC, StoneX
 
 
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