In response to a significant drop in fuel prices, major industrial consumers have intensified their hedging activities in the derivatives market. Last week, the price of Brent crude oil fell below $70 per barrel, prompting these consumers, including airlines and shipping companies, to purchase long contracts as a safeguard against future price spikes.
Data indicates that swap dealers’ long positions on Brent experienced a notable surge, marking the third-largest increase on record. This rise is attributed to a rush of over-the-counter trades aimed at capitalizing on potential price increases. Specifically, long positions held by swap dealers surged by nearly 50,000 lots, reaching their highest level since March 2023. Additionally, the long positions in Europe’s diesel benchmark also hit their peak since 2020.
The price slump, driven by concerns over global demand and OPEC‘s downward revision of oil demand growth estimates, resulted in Brent and the U.S. benchmark, WTI Crude, hitting nearly three-year lows on September 10. The drop in prices has catalyzed increased buying activity among consumers, as reflected in the rising volume of derivatives transactions.
Conversely, hedge funds and other portfolio managers adopted a bearish stance last week, heavily selling futures and options in the most actively traded petroleum contracts. For the first time since 2011, money managers held a net short position in Brent, reflecting a shift in market sentiment amid concerns over slower-than-expected global oil demand growth, exacerbated by weak economic indicators from China and declining refining margins.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, noted that a nearly 7% decline in crude prices triggered a wave of long liquidation and new short selling, resulting in the lowest combined net long positions in WTI and Brent in 12 years. He highlighted that the net long positions across major crude and fuel contracts fell to their lowest level since the ICE Exchange began tracking this data in 2011.
Despite the bearish trends, hedge funds resumed buying earlier this week due to ongoing disruptions in oil supply from Libya and interruptions in U.S. crude production caused by Hurricane Francine. Crude oil prices showed signs of recovery at the start of the week, bolstered by significant portions of U.S. production capacity in the Gulf of Mexico remaining offline.
Market sentiment is further influenced by expectations that the Federal Reserve may implement aggressive interest rate cuts by the end of the year. The interplay of the Fed’s monetary policy, demand from major oil-consuming countries, and the strategies of the OPEC+ group will likely continue to shape the oil market dynamics and inform the hedging strategies of large industrial consumers.
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