Portfolio investors anticipate petroleum prices will remain rangebound in the short term so positioning is increasingly focused on expected changes in relative performance among the major crude and fuels contracts.
On the crude oil side, investors have revealed a strong preference for Brent over WTI, while among fuels, US contracts are favoured over European gas oil.
Hedge funds and other money managers sold the equivalent of 11 million barrels in the six most important petroleum futures and options contracts over the seven days ending on 16 January.
Funds sold the equivalent of 24 million barrels in WTI while purchasing 18 million barrels in Brent, according to records filed with ICE Futures Europe and the US Commodity Futures Trading Commission.
There were only minor changes in U.S. gasoline (-3 million barrels), US diesel (-3 million) and European gas oil (+2 million).
But that left major divergences in positioning.
Funds were extremely bearish towards WTI, with a net position of just 43 million barrels, the third-lowest weekly position since 2013.
By contrast, they held a neutral position in Brent, with a position of 227 million barrels, almost exactly in line with the average since 2013.
Managers appear to have concluded production growth will continue to pressure prices in the United States while conflict in the Middle East will provide some support for prices in Europe and Asia.
On the fuels side, bullish positioning in US gasoline and US diesel (both in the 60-70th percentiles) contrasted with very bearish positioning in European gasoil (in the 13-14th percentile).
Funds appear to be betting on the contrasting economic outlooks between continued growth in the US economy and a lingering recession in Europe.
US natural gas
Investors are trying to build a bullish position in US gas in the expectation very low prices will eventually eliminate the current excess inventories.
The same strategy has been tried and failed repeatedly over the last year but must eventually work so investors are trying it again.
Hedge funds and other money managers purchased the equivalent of 331 billion cubic feet (bcf) of gas in the two major futures and options contracts over the seven days ending on 16 January.
Funds have been net buyers in each of the five most recent weeks, purchasing a total of 1,409 bcf since 12 December, the fastest rate of buying since June-July 2021 and before that April-May 2020.
As a result, the hedge fund community had built a net long position of 410 bcf (42nd percentile) up from a net short of 999 bcf (8th percentile) on 12 December.
Working gas stocks in underground storage amounted to 3,182 bcf on 12 January, which was the highest for the time of year since 2016 and 2012.
Inventories were 334 bcf (+12 per cent or +1.27 standard deviations) above the prior ten-year seasonal average and the surplus had swelled from 60 bcf (+2 per cent or +0.23 standard deviations) on 6 October.
But prices are also very low in real terms, limiting downside risk and creating scope for a rally if and when the surplus starts to diminish.
Front-month futures prices have averaged less than $2.90 per million British thermal units so far in January, in only the 10th percentile for all months since 2000, once inflation is taken into account.
Gas production growth is decelerating while the impact of a very strong El Nino which has suppressed heating demand during the winter of 2023/24 will fade.
So perhaps fund managers will have more luck with timing on this occasion.
* John Kemp is a Reuters market analyst. The views expressed are his own