Money managers started 2021 with optimism that oil prices will benefit from a rise in economic activity as vaccines are being rolled out. Hedge funds and other portfolio managers held at the end of December 2020 the most bullish overall position in the most traded oil futures and options contracts since the beginning of 2020. Fund managers held an overall net long position—the difference between bullish and bearish bets—of as much as 741 million barrels equivalent of oil in the six most important petroleum contracts as of December 29, according to data from exchanges compiled by Reuters columnist John Kemp.
This net long position was the highest net bullish bet on oil since January 2020, just before prices started crashing as the pandemic roiled oil and all other markets in February, March, and April.
The bullish positioning of the hedge funds at the start of 2021 was not without reason. The market overall, as well as many analysts, believe that oil will rise this year as global oil demand recoups most (but not all) losses from 2020. Vaccine rollouts are expected to support economic activity and travel later this year, while stimulus packages are set to boost major economies to rebound from last year’s recessions.
Hedge funds, therefore, started 2021 with a record net long position in all commodities, according to Saxo Bank.
“Overall, the biggest bets are held in crude oil with the combined 614k lots long in WTI and Brent representing a nominal value of $30 billion,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said in an analysis of the latest commitment of traders report with data for the week to December 29.
The net long position in crude oil—one of the two biggest commodity contracts in terms of exposure, together with gold—is still well below its peak at 1.1 million lots held in March 2018, says Hansen.
Nevertheless, the bullish bets on oil have dramatically increased from the lows in March and April, with most of the long positioning and short-covering taking place at the back end of 2020. Pharmaceutical companies started announcing vaccine candidates in November—vaccine candidates that obtained regulatory approvals within weeks. Vaccinations of front-line workers and vulnerable people began in many countries in weeks as well. The vaccine-led rally in oil had the market and speculators hopeful that with vaccines available in 2021, economies will recover faster, and demand for oil will increase.
The ratio of bullish to bearish bets on oil, however, has become the highest since January of last year, setting the stage for a pullback in bullish bets in the near term, from a positioning perspective.
Short-term demand-side prospects for oil are not bullish at all. The UK went this week into its third nationwide lockdown since the pandemic started, with people under stay-at-home order until mid-February except for work that cannot be done from home, essential shopping, or an hour of outdoor exercise. Germany and Italy, two other major economies in Europe, also extended their respective lockdowns.
However, the supply side of the oil market received on Tuesday a major shot in the arm from Saudi Arabia’s unilateral pledge to cut an additional 1 million bpd from its production in February and March, while Russia was allowed to boost its production by 65,000 bpd in each of the next two months.
The Russian insistence on lifting its production, which it got from the OPEC+ talks even in compromise lower volumes, and the major cut from Saudi Arabia to support prices show how far apart the positions of the two leaders of the OPEC+ alliance have grown. While this growing divergence on supply-fixing policies could mean deeper fractures within the group, it helped to support the oil market.
“The surprise cut from Saudi Arabia is constructive for oil, as it should ensure that the market continues to draw down inventories over 1Q20, despite worries over demand with a number of new lockdowns or the extension of existing lockdowns announced,” ING strategists Warren Patterson and Wenyu Yao said on Wednesday.
By Tsvetana Paraskova for Oilprice.com