Investors sold oil at the fastest rate for more than six months amid signs that Israel and Iran have chosen not to escalate their conflict, ensuring the rally in crude prices stalled well before reaching $100/bbl.

Hedge funds and other money managers sold the equivalent of 95 MMbbl in the six most important petroleum futures and options contracts over the seven days ending on April 23.

Sales were the fastest since October 2023 and take the two-week total to 119 MMbbl, according to reports filed with ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

The combined position was cut to 566 MMbbl (49th percentile for all weeks since 2013) from 685 MMbbl (66th percentile) on April 9, as the war risk premium evaporated.

The most recent week saw heavy selling across most of the complex, but especially in crude and European gas oil, the markets with most exposure to conflict in the Middle East.

Funds sold Brent (-39 MMbbl), NYMEX and ICE WTI (-26 MMbbl), European gas oil (-24 MMbbl) and U.S. gasoline (-7 MMbbl) but there was no change in U.S. diesel.

Total crude positions were trimmed to 453 MMbbl (46th percentile) from 522 MMbbl (59th percentile) earlier in the month at the height of the confrontation between Iran and Israel.

The ratio of bullish long positions to bearish short ones was cut even more aggressively to 3.51:1 (33rd percentile) down from a recent high of 4.97:1 (61st percentile) in late March.

Fund managers concluded there was no threat for now to oil production facilities around the Persian Gulf or tanker routes via the Strait of Hormuz.

Saudi Arabia and its OPEC+ allies continue to restrict production but are expected to increase output gradually in the second half of the year.

Non-OPEC production increases from the U.S., Canada, Brazil and Guyana are likely to cover most consumption growth in 2024.

Global inventories remain close to the long-term seasonal average while Saudi Arabia and other OPEC members in the Middle East have more than 4 million barrels per day of idled production capacity.

U.S. gasoline

Fund managers are showing a much wider range of views about the outlook for U.S. gasoline prices in an election year.

Funds still held a net long position of 73 MMbbl (79th percentile) on April 23, down only slightly from a recent high of 85 MMbbl (88th percentile) on April 9.

But the number of short positions had more than tripled to 27 MMbbl from a recent low of fewer than 9 MMbbl on March 12.

Long positions outnumbered shorts by a ratio of 3.72:1 (43rd percentile) down from 8.73:1 (76th percentile) six weeks earlier.

U.S. gasoline consumption remains buoyant, underpinned by steady growth in employment and incomes, while refinery fuel production faces an elevated risk from an active hurricane season.

But Ukraine’s drone attacks on Russia’s refineries have been scaled back following pressure from the U.S., reducing the threat to global gasoline supplies.

U.S. gasoline stocks are only slightly lower than average for the time of year and the deficit has stabilized after operations resumed at BP’s Whiting refinery in Indiana.

At least some hedge funds seem to have concluded prices had risen too far too fast, and the trade had become crowded, creating more risk on the downside.

U.S. natural gas

Funds became less bearish about the outlook for U.S. gas prices over the week ending on April 23, despite a continued increase in excess seasonal inventories.

Hedge funds and other money managers purchased the equivalent of 382 Bcf in the two major futures and options contracts tied to prices at Henry Hub in Louisiana.

Buying was the fastest for eight weeks since early March, shortly after major gas producers announced cuts in drilling and output.

The combined position was lifted to a net short of just 102 Bcf (29th percentile for all weeks since 2010) up from 483 Bcf (19th percentile) the previous week and 1,675 Bcf (2nd percentile) two months ago.

Working gas inventories swelled to 2,425 Bcf on April 19, the highest for the time of year since 2016 and before that 2012.

Inventories were a massive 679 Bcf (+39% or +1.46 standard deviations) above the prior ten-year seasonal average.

The cost of physical gas actually delivered to electricity generators has fallen to its lowest level since 1974 in real terms.

But ultra-low prices are increasingly encouraging gas-fired generators to run as baseload, including throughout the night.

Gas-fired units are displacing even more coal and pushing generators’ gas combustion to seasonal records. Record gas generation during the hot summer months is likely to narrow the surplus.

Reduced gas drilling will filter through into slower production growth by the end of the year, while the winter of 2024/2025 is likely to be colder than the record warm winter of 2023/2024, with El Nino fading.

From both positioning and fundamental perspectives the balance of price risks has shifted to the upside in recent weeks.

Fund managers are responding by trying to become more bullish or at least less bearish, for the fourth time in a year.

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