(John Kemp is a Reuters market analyst. The views expressed are his own.)
By John Kemp
LONDON (Reuters) – Hedge funds showed signs of trying to pick the bottom in the oil market last week, with small-scale purchases emerging after the wave of heavy selling at the end of September and early October.
Hedge funds and other money managers were net buyers of 22 million barrels of petroleum futures and options in the week to Oct. 22, after selling 206 million barrels in the three weeks between Sept. 17 and Oct. 8.
Portfolio managers bought Brent (+5 million barrels), U.S. gasoline (+4 million), U.S. heating oil (+9 million) and European gasoil (+3 million) while the net position in WTI was unchanged.
The hedge fund community is still running a bearish position overall, with dynamic positioning, excluding passive longs, equivalent to 31 million barrels net short, but that was up from 53 million the week before.
From both a positioning and a fundamental perspective, however, the worst of the sell-off in oil may be over for the time being, encouraging funds to trim short positions and start establishing fresh longs.
By early October, hedge funds had become more bearish about the outlook for oil than at any time since just after the start of the year (https://tmsnrt.rs/2NjGzkn).
The ratio of long to short positions, the most useful measurement of fund sentiment, had fallen to just 2.6:1, down from 8.7:1 in April and the lowest since Jan. 22.
Extremely low ratios preceded waves of fund buying and big price rises in both late 2017 and early 2019; at least some managers seem to be anticipating at repeat.
From a fundamental perspective, the news flow has also improved, or at least stopped deteriorating.
The global economy and oil consumption growth have decelerated sharply over the last year but there have been few signs of second-round effects so far that would turn a slowdown into an outright recession.
The Fed and other central banks have started to cut interest rates to keep the expansion going, and there are renewed hopes for a trade truce between the United States and China, which should be positive for oil demand.
On the supply side, the number of rigs drilling for oil in the United States has now fallen by almost a quarter since the fourth quarter of 2018 which should filter through into slower production growth in 2020.
Saudi Arabia and its allies in the expanded OPEC+ group of major oil-exporting nations are also considering extending and possibly deepening their existing production cuts to accelerate market rebalancing.
If the outlook for prices is not exactly bullish, it is no longer becoming more bearish, and that is enough for some funds to start trimming short positions and establishing new longs to capitalize on the resulting bounce in prices.
(Editing by David Evans)