Hedge funds and Commodity Trading Advisors (CTAs) reduced their longs across the four main Brent and WTI contracts by 64.7 million barrels week on week to a 12-year low of 395.2 million barrels, bringing the cumulative liquidation over the past three weeks to 200 million barrels.
That’s what analysts at Standard Chartered Bank, including Commodities Research Head Paul Horsnell, said in a report sent to Rigzone late Tuesday by Horsnell, adding that “this is an all time record, exceeding the 194 million barrels of liquidation over three weeks at the start of the 2020 pandemic”.
“Speculative shorts increased by 34.2 million barrels week on week to 243.1 million barrels, with the net speculative long falling 98.9 million barrels week on week to 152.2 million barrels; the net long has only been lower in one week over the past 12 years,” the analysts added.
“Our crude oil money manager positioning index fell 35.4 week on week to -89.2 with crude oil, heating oil, and gasoline all now at, or close to, maximum speculative bearishness,” they continued.
“Long-short ratios also fell sharply with the ratio for the ICE Brent contract falling 0.4 week on week to 1.1, which is the lowest reading since comparable data starts in 2011,” the analysts went on to state.
In the report, the Standard Chartered analysts said they think an overextension of macro-led speculative shorts laid the basis for the sharp rally in prices over the past week.
“Front-month Brent settled at $82.30 per barrel on 12 August, a week on week increase of $6.00 per barrel, while front-month WTI rose $7.12 per barrel week on week to $80.06 per barrel,” they added.
“Volatility has followed prices higher, with realized annualized 30-day Brent volatility rising 5.2 percentage points week on week to a six-month high of 27.7 percent. While volatility is still in the lower half of its 10-year distribution, it is now in the 40th percentile having spent much of July in the lower five percent tail,” they continued.
The analysts noted in the report that the default media explanation when prices rally so fast is a geopolitical premium.
“This tends to be an ex-post explanation and is not very illuminating; prices fall and reports say the geopolitical premium has eased, prices rise and reports say the geopolitical premium has increased,” they said.
“We find the whole concept of a geopolitical premium unsatisfactory. It effectively involves a comparison with a counterfactual universe where specific real-life events are not happening,” they added.
“However, the geopolitical context does matter in that an increase in uncertainty usually makes it harder to sustain a short position and it is possible that mounting concern about the potential for an expanded Middle East conflict may have played a role in sustaining the latest short-covering rally,” the analysts continued.
The Standard Chartered analysts stated, however, that they have not noticed any significant flows into the long side of the market that have been motivated by taking a position on current Middle East dynamics.
In an oil and gas report sent to Rigzone on August 12, Macquarie strategists noted that both WTI and Brent speculative net length fell over the past week.
“WTI net length decreased 30.8K while Brent dropp[ed]… by 30.3K. WTI spec net length shrunk with over four times the liquidation of longs as new short interest,” the strategists said in the report.
“Brent recorded a smaller move with the long short ratio decreasing from 0.79 to 0.73 as the drop in longs exceeded the increase in shorts,” they added.
The strategists warned in the report that crude positioning is becoming increasingly bearish with managed money net-length in ICE Brent at its lowest since the statistic began in 2011.
“Overall managed money net length between WTI and Brent is at the lowest level since June with longs last seen at this level in December 2012,” they said in the report.
“The recent speculator liquidation has continued through increased Middle East tension between Israel, Iran, and Hezbollah and seasonally tightening physical crude market,” they added.
“Refined product capital flows have largely mirrored crude’s flows with NYMEX RBOB speculator net length at its lowest level since January 2007,” the strategists went on to note.
The Macquarie strategists highlighted in the report that, last week, the oil price “recovered from January level lows after the sell-off possibly entered oversold territory”.
“Even though we turned bearish a few weeks ago, the correction seemed ahead of schedule to us. Over the next few weeks, we expect further support from inventory draws ahead of fall turnarounds (T/A),” they added.
“Ultimately, we anticipate correction in 4Q24 as supply/demand surpluses increase. These surpluses are driven by accelerating U.S. supply growth, the partial return of OPEC+ barrels, softening distillate demand and a larger than normal refining T/A season,” they continued.
To contact the author, email andreas.exarheas@rigzone.com