LONDON- Hedge funds sold oil last week, reversing most of the purchases made the week before, as tensions in the Middle East reached a fragile equilibrium and prospect of armed conflict receded.

Hedge fund and other money managers were net sellers of 65 million barrels of futures and options linked to petroleum prices in the week to July 23, after buying 84 million barrels in the week to July 16.

The United Kingdom and Iran have now each detained a tanker and show signs of trying to negotiate a face-saving swap, which makes further seizures by either side unlikely for the time being. Maritime deterrence has been restored.

The United States, the United Kingdom, Saudi Arabia, the United Arab Emirates and Iran have all signalled a desire to avoid a further escalation of their disputes in the Gulf.

With the maritime situation reaching a fragile equilibrium, at least temporarily, traders' attention has switched back to flagging global growth and its impact sapping oil consumption.

Hedge funds last week sold Brent (-24 million barrels), NYMEX and ICE WTI (-33 million), U.S. gasoline (-9 million) and U.S. heating oil (-1 million) though they bought a small quantity of European gasoil (+3 million).

Portfolio managers were especially aggressive in shorting NYMEX WTI, where short positions leapt by almost 25 million barrels in the week to July 23, the largest one-week increase for almost two years.

The fundamental outlook for prices remains bearish with the market expected to remain oversupplied throughout the remainder of 2019 and into 2020.

The threat of armed conflict and disruption of supplies in the Gulf can induce volatility and produce vigorous short-covering rallies, as the tanker conflict has proved.

But once military tension subsides, the weakness in global manufacturing and trade and slack oil consumption has tended to put renewed pressure on prices.