Hedge fund managers are becoming steadily more bullish on the outlook for oil prices as Saudi Arabia makes deep cuts in production, sanctions hit Venezuela and Iran, and the US and China inch towards a trade deal.
Hedge funds and other money managers were net buyers of 32 million barrels of Brent crude futures and options in the week to Feb. 22, according to position records published by ICE Futures Europe.
Portfolio managers have been net buyers of Brent in nine out of the last 10 weeks, boosting their net position by a total of 130 million barrels since Dec. 4.
Last week saw the largest purchases so far.
Earlier in the current cycle most position-building came from closing previous bearish short positions, but the balance shifted in the most recent week with most accumulation from initiating new bullish long positions.
Fund managers opened 29 million barrels of new long positions while cutting short positions by 3 million barrels in the week to Feb. 12.
Funds now hold a net long position of 266 million barrels in Brent, up from 136 million at the start of December, though still far below the almost 500-million-barrel position at the end of September.
Similar position-building is evident in European gasoil, where funds were net buyers of 11 million barrels of futures and options in the week to Feb. 12.
Portfolio managers have been net buyers of gasoil for six consecutive weeks, with total purchases amounting to 38 million barrels.
Like Brent, last week's purchases of gasoil contracts were the largest so far, and the balance has shifted from short covering to initiating new long positions.
Saudi Arabia has eased concerns about oversupply by acting as swing producer, cutting output promptly despite poor compliance from other members of the Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+.
US sanctions on Iran and Venezuela have also removed significant volumes of oil from the market, especially heavy gasoil-rich crudes, adding to the sudden tightening of the supply side.
At the same time, traders have become more optimistic trade negotiations between the United States and China will avoid the imposition of new tariffs on March 2 and avert a global recession, shoring up demand.
While oil consumption growth may not accelerate, avoiding tariffs and a recession would ensure it does not slow any further, easing fears about an oversupplied oil market in 2019.
Record hedge fund sales forced an abrupt change in strategy by OPEC+ in the fourth quarter as the global economy and oil consumption outlook deteriorated.
But now the producer group has shifted course, hedge fund buying has accelerated the recent rise in Brent prices, providing Saudi Arabia with an early payoff for production cuts, and validating OPEC+ strategy.
And because hedge fund positions tend to be concentrated in contracts nearest to maturity, which offer the best liquidity, buying has also accelerated the shift in the calendar spreads from contango to backwardation.
Provided the United States and China can avoid another round of tariffs, and the global economy skirts recession, the balance of price risks is likely to remain tilted towards the upside.