Money managers started 2021 with optimism that oil prices will benefit from an increase in economic activity as vaccines are being launched. Hedge funds and other portfolio managers maintained at the end of December 2020 the most optimistic overall position in the most traded oil futures and options contracts since the beginning of 2020. Fund managers maintained an overall net long position – the difference between bullish and bearish bets – of up to 741 million barrels of oil equivalent in the six most important oil contracts on December 29, according to stock data compiled by Reuters columnist John Kemp.
This net long position was the biggest net bullish bet on oil since January 2020, just before prices started to fall with the oil pandemic and all other markets in February, March and April.
The optimistic positioning of hedge funds in early 2021 was not without reason. The market in general, like many analysts, believes that oil will increase this year, as global demand for oil recovers most (but not all) of 2020 losses. The launch of vaccines should support economic activity and travel later this year, while stimulus packages set to propel major economies to recover from last year’s recessions.
Hedge funds therefore started 2021 with a record net long position in all commodities, according to Saxo Bank.
Related: US oil executives cautiously optimistic about 2021
“Overall, the biggest bets are placed on crude oil with the 614,000 lots combined in WTI and Brent representing a face value of $ 30 billion,” said Ole Hansen, head of commodity strategy at Saxo Bank, in an analysis of the most recent commitment by traders to report data for the week through December 29.
The net long position in crude oil – one of the two largest commodity contracts in terms of exposure, along with gold – is still well below its peak of 1.1 million lots in March 2018, Hansen said.
However, bullish bets on oil have increased dramatically since the lows in March and April, with most of the long positioning and short coverage occurring in late 2020. Pharmaceutical companies began announcing vaccine candidates in November – vaccine candidates that obtained regulatory approvals within weeks. Vaccination of frontline workers and vulnerable people has also started in many countries in weeks. O rally led by oil vaccine the market and speculators were hopeful that, with vaccines available in 2021, economies would recover more quickly and demand for oil would increase.
The proportion of bullish bets to bearish bets on oil, however, has become the highest since January last year, creating the scenario for a retraction in bullish bets in the short term, from a positioning perspective.
The short-term prospects for the oil demand side are not optimistic at all. The UK entered this week third national blockade from the start of the pandemic, with people being asked to stay home until mid-February, except for work that cannot be done at home, essential shopping or an hour of outdoor exercise. Germany and Italy, two other important European economies, also extended their respective blockades.
However, the supply side of the oil market on Tuesday received a big shot in the arm of the Saudi Arabia’s unilateral pledge cut an additional 1 million bpd of its production in February and March, while Russia was allowed to increase its production in 65,000 bpd in each of the next two months.
As a result, oil prices skyrocketed on Wednesday morning to their highest level since February 2020, with WTI Crude trading above $ 50 a barrel and Brent Crude above $ 54.
The Russian insistence on raising its production, which it obtained in the OPEC + negotiations even in smaller volume commitments, and the great Saudi cut to sustain prices show how the positions of the two leaders of the OPEC + alliance have distanced themselves. While this growing divergence in supply-fixing policies could mean deeper fractures within the group, it helped support the oil market.
“Saudi Arabia’s surprise cut is constructive for oil, as it should ensure that the market continues to reduce inventories throughout 1Q20, despite concerns about demand with a series of new blocks or the extension of existing blocks announced,” ING strategists Warren Patterson and Wenyu Yao said on Wednesday.
By Tsvetana Paraskova for Oilprice.com
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