Oil Futures Market Struggles with Bearish Sentiment Despite Recent Buying Surge

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Traders Cut Long Positions Amid Concerns Over Demand and Supply

Despite a modest increase in bullish positions last week, portfolio managers have significantly reduced their long positions in the oil futures market over the past two months. This reduction is driven by concerns about slowing demand and rising supply.

In the week ending August 27, hedge funds and commodity trading advisors were net buyers of the equivalent of 32 million barrels in the six most traded crude and petroleum futures contracts. This followed a net sale of 48 million barrels the previous week, according to data compiled by energy analyst John Kemp in his blog.

Bearish Outlook Persists

However, this recent buying activity has done little to counteract the dramatic decline in bullish bets on the oil futures market, which have more than halved since early July. Traders remain largely bearish, particularly due to worries about global oil demand and the potential impact of increased supply from OPEC+.

This week, OPEC+ decided to postpone any additional output hikes for at least two more months. Despite this decision, the market remains concerned that it will not be able to absorb extra barrels given the slower-than-expected demand and rising supply from non-OPEC+ countries, including the U.S., Canada, Brazil, and Guyana.

Libyan Production Halt Influences Brent Crude

In the week ending August 27, there was an increase in long positions for Brent Crude. This uptick was influenced by the halt in part of Libya’s oil production due to a political standoff between rival governments in the country. As a result, the net long position for Brent Crude, which is the difference between bullish and bearish bets, surged by 31% to 81,000 lots. Conversely, demand for the U.S. benchmark WTI remained relatively subdued.

Ole Hansen, Head of Commodity Strategy at Saxo Bank, noted that overall combined net long positions stood at 267,000 lots, which remains near the lower end of the long-term range. This cautious stance reflects traders’ skepticism about crude oil’s potential for significant gains amid OPEC+ production increases and weakening demand from China.

Bearish Sentiment and Market Challenges

The bearish positioning of hedge funds indicates that there is considerable room to either cut short positions or add long positions. However, since the end of the reporting period on August 27, additional bearish news and data have continued to weigh heavily on market sentiment and oil prices.

Impact of Potential Fed Interest Rate Cuts

Even with the possibility of the Federal Reserve easing monetary policy later this month, oil market participants remain apprehensive. They worry that the global oil futures market has been weaker than expected during the peak summer months and that China has yet to introduce additional stimulus measures to boost its economy and drive higher oil demand.

To improve market sentiment and encourage a more bullish outlook on oil, there will need to be a strong end-of-summer demand report and evidence of declining commercial inventories worldwide. Until then, traders remain cautious and skeptical about the prospects for oil prices.

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