Column: Investors surge back into oil on rising economic optimism: Kemp

LONDON, Jan 24 (Reuters) – Portfolio investors rallied in oil futures and options at the fastest rate in more than two years as concerns about a slowdown in the global business cycle eased.

Hedge funds and other money managers bought the equivalent of 89 million barrels in the six major oil contracts over the seven days ending January 17.

Purchases were fastest since November 2020 (shortly before the first successful coronavirus vaccine trials were announced) and before that April 2020 (when the first lockdowns began to ease).

The buying wave was led by crude (+ 78 million barrels), especially Brent (+ 55 million), with smaller purchases in NYMEX and ICE WTI (+ 23 million).

Total Brent positions rose to 212 million barrels (44th percentile for all weeks since 2013) up from 157 million (22nd percentile) on January 10 and a recent low of 89 million only (4th percentile) on 13 December.

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Long bullish positions exceeded short bearish ones in Brent with a ratio of 5.30: 1 (63 percentile) from 3.07 (28 percentile) on January 10 and 1.95 (6 percentile) on December 13.

The increase in investors’ Brent positions was the largest since August 2018 and the sixth largest in 514 weeks since the time series began in 2013.

Chartbook: Investors’ oil positions

The sudden turnaround seems to have been driven by a combination of low initial positioning and a sudden increase in confidence about the outlook for the global economy and oil consumption.

Recent inflation data showed that the rate of price increases is moderating, raising hopes for an early peak in the interest rate cycle.

With gas and electricity prices falling in recent weeks, some leading forecasters now expect the eurozone as well as the United States to avoid a formal recession in 2023.

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China also appears to be moving forward with the reopening of the economy after three years of intermittent and disruptive lockdowns.

Due to the speed of transmission, the current wave of infection is likely to be completed by the end of February or early March.

By April, there is likely to be a very large increase in domestic and international passenger travel by air, rail and road, leading to a large increase in fuel consumption.

China’s reopening industrial economy is also likely to stimulate domestic diesel consumption and a spillover stimulus to other economies in Asia.

Ironically, the biggest risk to the economy and oil consumption is that the economic revival raises inflationary pressures and forces the major central banks to persist in raising interest rates for longer and higher.

Related columns:

– Bullishness on oil in early 2023 (Reuters, January 16)

– Hedge fund oil purchases stalled over year-end (Reuters, January 9)

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– Bullish oil investors look beyond China’s COVID wave (Reuters, January 3)

– Investors abandon oil bullish positions as recession looms (Reuters, December 12)

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

Editing by Mark Potter

Our Standards: The Thomson Reuters Fiduciary Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence and freedom from bias.

John Kemp

Thomson Reuters

John Kemp is a senior market analyst specializing in oil and energy systems. Before joining Reuters in 2008, he was a trading analyst at Sempra Commodities, now part of JPMorgan, and an economic analyst at Oxford Analytica. His interests include all aspects of energy technology, history, diplomacy, derivatives markets, risk management, politics and transitions.

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