Benchmark crude oil prices have surged to a three-month high as Saudi Arabia and its allies in OPEC⁺ extended production cuts. This move has prompted investors to cover their bearish short positions, resulting in a rush to purchase petroleum futures and options contracts.
Hedge funds and other money managers bought a total of 52 million barrels over the seven days ending on July 25, following their purchase of 229 million barrels over the previous four weeks. The majority of these purchases were in contracts linked to crude oil, with a focus on NYMEX and ICE WTI.
The extension of production cuts by Saudi Arabia, coupled with increased optimism about the US economy’s potential soft landing, has alleviated some of the pessimism surrounding WTI positions. As a result, bearish short positions were reduced by 104 million barrels, while bullish long positions increased by 65 million across NYMEX and ICE WTI contracts.
This short-covering activity has led to a significant increase in front-month WTI futures prices, jumping from less than $68 per barrel on June 27 to over $81 per barrel on August 1.
In addition to the surge in crude oil contracts, fund managers have also shown growing optimism in fuel prices. They purchased contracts tied to the price of refined fuels, particularly middle distillates, indicating a belief that fuel consumption will tighten already-depleted fuel supplies once the US and global economies rebound.
European gas oil futures and options saw a rapid increase in positions over the four-week period, signaling a potential tightening of supplies if the US economy expands after a soft landing.
Despite slightly above-average inventories and a surplus that has only slightly eroded, portfolio investors are trying to adopt a bullish stance on US natural gas. This is driven by a decline in the number of rigs drilling for oil and gas, which is expected to result in reduced production.
Overall, the balance of price risks is tilting toward an upward trend in the oil and gas industry, leading investors to cautiously rebuild their bullish positions in anticipation of further market shifts.
In conclusion, the extension of production cuts by Saudi Arabia and its allies in OPEC⁺ has caused benchmark oil prices to surge, prompting investors to cover their bearish positions. The optimism surrounding the US economic soft landing and the potential rebound of fuel consumption has also contributed to increased bullish sentiment. While challenges remain, market players are cautiously positioning themselves for potential market shifts.
