Funds rotate positions from crude oil to distillates
(Reuters) - Portfolio investors are rotating positions from crude oil to middle distillates – anticipating that the low level of distillate inventories will keep prices relatively firm even if the global economy and petroleum consumption slow.
Hedge funds and other money managers sold the equivalent of 21 million barrels of crude oil options and futures but purchased 18 million barrels of products, including 14 million of distillates, over the week ending on June 13.
The biggest rotation has been from U.S. crude to European gas oil, reflecting the rise in crude inventories in the United States while stocks of distillates, used heavily in Europe, remain well below normal around the world.
Fund positions in NYMEX and ICE WTI have been reduced in seven of the last eight weeks by a total of 126 million barrels since April 18.
The WTI position is now just 73 million contracts (2nd percentile for all weeks since 2013) with long positions outnumbering shorts by 1.49:1 (3rd percentile).
At the same time, fund managers have boosted positions in European gas oil in five of the last six weeks by a total of 24 million barrels since May 2.
The most recent weekly increase in gas oil positions was the largest for almost two years since August 2021 and before that November 2020.
Funds had already built a fairly sizeable position in U.S. diesel and now bullishness is starting to spill over into European gas oil.
Crude and distillate consumption are both strongly correlated with the business cycle, but low distillate stocks will provide support in the event the global economic slowdown intensifies or an extra boost if recession is averted.
U.S. commercial crude oil inventories were 16 million barrels (+4% or +0.28 standard deviations) above the prior ten-year seasonal average on June 9.
By contrast, U.S. distillate stocks were 20 million barrels (-15% or -1.06 standard deviations) below the ten-year seasonal average.
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