In the final week of 2021, hedge funds bought petroleum futures and options contracts at the fastest pace in four months after market sentiment shifted over the past month from panic over Omicron’s potential impact on oil demand to moderate optimism that this COVID wave would not dent fuel consumption too much. Speculators and portfolio managers now appear more bullish on oil prices after the initial Omicron scare at the end of November that led to panic-selling and to the largest one-day slump in oil since April 2020.
Despite the record high COVID cases in many countries in recent days, the market is encouraged by early data suggesting that the Omicron COVID variant is less severe.
The OPEC+ group’s continued management of oil supply, restraint from U.S. shale producers, and the belief that Omicron might slow but not upend global oil demand recovery this year makes hedge funds more optimistic about oil’s prospects in 2022 than they were a month ago.
The two major crude oil benchmarks, Brent and WTI, have already fully recovered from the end-November sell-off and were trading early on Wednesday close to the levels before the emergence of the Omicron variant spooked the markets.
Portfolio managers bought the equivalent of 54 million barrels in the six most actively traded petroleum futures and options contracts in the latest reporting week to December 28, with Brent and WTI leading the rise in longs, according to data from exchanges compiled by Reuters market analyst John Kemp.
The rise in longs in petroleum contracts in the last week of 2021 was the largest since August, suggesting that fund managers are now more optimistic in adding bullish bets on oil, especially compared to the end-November-early-December bearish anxiety about Omicron’s impact on global oil demand.
Speculators not only opened new longs, but they also closed shorts from the previous weeks.
“Having seen crude oil fully recover from the November omicron scare, speculators returned to the buy side during the final week of 2022,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said, commenting on the latest commitment of traders (COT) report for the week to December 28.
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The combined net long in Brent and WTI contracts—that is the difference between bullish and bearish bets—jumped by 50,000 lots, or by 10 percent, to a five-week high of 454,000 lots, Hansen said.
The oil market has fully recovered from the November omicron scare, with rising prompt spreads (backwardation) in both WTI and Brent signaling a tightening market, Hansen said on Tuesday.
It looks like hedge fund managers have realized that the initial knee-jerk reaction to Omicron with mass sell-offs has been excessive, and they have now recalibrated their expectations about the impact of the variant on oil demand. Jet fuel consumption is suffering—again—due to flight cancellations, but fuel demand elsewhere seems to be holding resilient through the Omicron wave.
The major driver of oil markets in recent years, the OPEC+ group, reiterated this week its view that Omicron will have a mild and short-lived impact on oil demand and prices. The assessment was made a day before the alliance decided on Tuesday to add another 400,000 barrels per day to its total oil production in February in a widely expected move to continue easing the cuts each month.
“The move from OPEC+ provides some comfort to the market as it signals that they are confident with the demand outlook in the coming months,” ING strategists Warren Patterson and Wenyu Yao said on Wednesday.
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Brent prices have rallied by more than 10 percent since mid-December, taking the market back within a striking distance of the $80 a barrel level, they said on Tuesday, attributing the rise to the growing belief that Omicron would be milder than previous COVID variants and the recent supply disruptions in Libya.
Sure, the COVID scares are not over, but oil market participants seem to believe now that flare-ups in the number of cases will not materially dent global oil demand.
By Tsvetana Paraskova for Oilprice.com
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