LONDON - Investors continued to buy petroleum future and options, with the focus on crude, but the buying has slowed as almost all short positions have been covered and the market has begun to look stretched on the bullish side.

Hedge funds and other money managers purchased the equivalent of 25 million barrels in the six most important petroleum-related futures and options contracts over the seven days ending on Sept. 19.

Fund managers had purchased a total of 155 million barrels in the three weeks since Aug. 29, according to position records filed with ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

As in previous weeks, the buying was focused almost entirely on crude, with significant purchases of both Brent (+18 million barrels) and NYMEX and ICE WTI (+17 million barrels).

Funds had bought a total of 183 million barrels of crude-related futures and options in the four weeks since Aug. 22.

The net position had risen to 535 million barrels (59th percentile for all weeks since 2013) up from 352 million barrels (20th percentile) four weeks earlier.

But positioning had become increasingly lopsided with bullish longs outnumbering bearish shorts by a ratio of 7.76:1 (89th percentile) up from 3.39:1 (31st percentile).

Such one-sided positioning is usually a sign the market has become stretched and presages a reversal in the recent price trend.

Chartbook: Oil and gas positions

In this case, most of the former bearish short positions have been closed out as prices have risen steadily since the end of June.

Funds held just 20 million barrels of shorts in the NYMEX WTI contract, essentially unchanged from 21 million the previous week, but down from a high of 136 million at the end of June.

The short selling cycle that started in the middle of April appeared to have been completed by the middle of September with short positions reverting to a historically low level.

Extra production cuts announced by Russia and Saudi Arabia have reduced crude inventories, especially around the NYMEX delivery point at Cushing in Oklahoma.

Cushing stocks were 18 million barrels (-43% or -1.16 standard deviations) below the ten-year seasonal average on Sept. 15, with the deficit widening from just 1 million barrels (-2% -0.06 standard deviations) on June 30.

In the process, short sellers have been squeezed, helping lift front-month WTI prices to over $91 per barrel from less than $70 in late June.


Portfolio investors remained ambivalent about the outlook for U.S. gas prices as the steady erosion of excess inventories was offset by the prospect of a warmer-than-average winter.

Hedge funds and other money managers sold the equivalent of 90 billion cubic feet of futures and options on gas prices at Henry Hub in Louisiana over the seven days ending on Sept. 19.

As a result, the net position was trimmed to 107 billion cubic feet (35th percentile for all weeks since 2010) down from a high of 743 billion cubic feet (48th percentile) on July 11.

Working inventories in underground storage were just 67 billion cubic feet (+2% or +0.23 standard deviations) above the prior 10-year seasonal average on Sept. 15.

The surplus has narrowed consistently from 299 billion cubic feet (+12% or +0.81 standard deviations) on June 30.

In other circumstances, the tightening of inventories would probably have lifted futures prices, but investors remain wary of the strong El Niño developing in the central and eastern Pacific.

In the last 50 years, strong El Niño conditions have cut U.S. winter heating demand by 7% on average, which if it happened again could leave the market with a large inventory surplus at the end of winter 2023/24.

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

(Editing by Barbara Lewis)