Investors Dumped Oil as Banking Crisis Erupted

Hedge funds and other money managers sold the equivalent of 139 million barrels in the six most important futures and options contracts over the seven days ending March 14.

The volume of sales was the 12th largest in the 522 weeks since ICE Futures Europe and the U.S. Commodity Futures Trading Commission started to publish records in this form in 2013.

Fund managers have sold a total of 148 million barrels since the end of January, taking their combined position to 432 million barrels (20th percentile for all weeks since 2013).

In the most recent week, there were heavy sales of Brent (-65 million barrels), NYMEX and ICE WTI (-59 million), U.S. gasoline (-12 million) and European gas oil (-7 million), with only minor buying of U.S. diesel (+4 million).

Investors have become much more cautious about the outlook for oil prices since the end of January in response to persistent inflation, rising interest rates and a crisis of confidence engulfing banks in North America and Europe.

Bullish long positions outnumber bearish long positions by a ratio of 3.42:1 (37th percentile) down from 5.93:1 (80th percentile) on January 24.

Chartbook: Investor positions in petroleum

In November 2022, far more U.S. banks expected to expand their balance sheets over the next six months (26 out of 80 institutions) than reduce it (8 of 80), according to the Federal Reserve’s Senior Financial Officer Survey.

As recently as January 2023, only a minority of banks said they had tightened credit standards, imposed tougher conditions or increased spreads over the last three months, according to the Fed’s Senior Loan Officer Opinion Survey.

In the wake of the banking crisis however, credit conditions in North America and Europe are set to tighten significantly as banks fortify their balance sheets to protect themselves against possible runs.

Stress-driven tightening will amplify the tightening already underway as a result of central-bank driven interest rate increases.

Reduced credit availability to households and businesses, hitting the most marginal borrowers hardest, is an extra headwind that will likely lead to slower economic growth and a lower trajectory for petroleum consumption.

John Kemp is a Reuters market analyst. The views expressed are his own