Investors Growing More Bullish On Oil

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By Irina Slav

Investors are becoming increasingly bullish on crude oil, with trading activity on the most popular crude and fuels contracts off to a strong start of the year.

Reuters’s John Kemp reported yesterday that hedge funds had increased their purchases of crude oil and fuels by the equivalent of 51 million barrels in the week to January 12. This, Kemp noted, was the biggest weekly buying spree for the past seven weeks, bringing the total to 540 million barrels of oil equivalent since mid-November.

Bloomberg also notes a sharp uptick in buying on the oil futures market as the outlook on the commodity brightened, and banks started revising their price forecasts for this year upwards.

“People are reconsidering the investment case for the commodities asset class,” Bloomberg quoted Harry Tchilinguirian, oil strategist at BNP Paribas, as saying. “Open interest in oil is rising again as macro-oriented funds look at the case for commodities.”

There is also considerable hedging activity, the Bloomberg report noted. West Texas Intermediate has been rising as strongly as Brent crude, with 2022 futures close to hitting $50 a barrel—a level at which a “big chunk” of U.S. shale oil is profitable, according to the head of the International Energy Agency, Fatih Birol.

As a result, embattled shale drillers are hedging their future production at these higher prices thanks to the rollout of Covid-19 vaccines and continued OPEC+ cuts with an additional gift of a 1-million-bpd cut in Saudi production.

Some have started to wonder if shale producers would be able to resist the siren call of production growth. In the meantime, sentiment among traders has almost recovered to pre-pandemic levels. Kemp reports the ratio of long to short positions in the week to January 13 stood at more than 5:1, which compared to below 2:1 in November.

A year ago, the Reuters analyst noted, the long:short position ratio stood at between 6:1 and 7:1.

By Irina Slav for Oilprice.com

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