Big industrial consumers of fuel jumped to hedge on the derivatives market against future spikes in fuel prices by buying long contracts on Brent as the price of the international benchmark slumped below $70 per barrel last week.
Swap dealers' long positions on Brent Crude soared by the third-largest jump on record last week as over-the-counter trades to profit from higher prices accelerated.
Industrial consumers such as airlines and shipping companies typically hedge their exposure to the oil and fuels market. In buying derivatives in over-the-counter trades, they would profit from higher crude oil prices as a hedge against a rise in fuel costs.
So last week, the long positions on Brent held by swap dealers-often viewed as a proxy for the hedges of industrial consumers-surged by nearly 50,000 lots, according to Bloomberg data. Overall, the longs held by swap dealers were at their highest level since March 2023 and the third-largest increase on record. The long positions of the swap dealers in Europe's diesel benchmark hit the highest level since 2020.
Early last week, Brent Crude prices crashed to below $70 per barrel amid concerns about global demand and the second consecutive downward revision to oil demand growth estimates by OPEC.
On September 10, both Brent and the U.S. benchmark, WTI Crude, settled at a nearly three-year low - at their lowest level since December 2021.
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The price slump triggered heavy buying by consumers, as evident in the over-the-counter derivatives transactions, analysts told Bloomberg.
Meanwhile, hedge funds and other portfolio managers heavily sold futures and options in the most traded petroleum contracts last week.
For the first time in recorded history, since 2011, money managers held a net short position in Brent. The net length-the difference between bullish and bearish bets-flipped to a net short in the reporting week to September 10, as speculators and traders remained concerned about lower-than-expected global oil demand growth. Weakness in Chinese economic indicators and falling refining margins exacerbated the bearish sentiment on oil in the first two weeks of September.
"A near 7% slump in crude through technical support levels triggered a combination of long liquidation and fresh short selling, which overall left the combined net long in WTI and Brent at the lowest level in 12 years," Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote this week, commenting on the latest commitment of traders (COT) report.
Moreover, persistent weakness across the refined fuel market helped drive an increase in the net short position in the European and U.S. diesel futures.
"Combining the five major crude and fuel contracts, the net long of these fell to the lowest level since 2011, when the ICE Exchange started to collect Brent and gas oil data," Hansen added.
Among individual contracts, Brent saw heavy selling and a net short for the first time ever. The net long position in WTI shrank, but remained above the 2023 low.
Early this week, hedge funds returned to buying amid continued oil supply disruptions in Libya and the disruptions to U.S. crude oil production due to Hurricane Francine.
Crude oil prices recovered somewhat at the start of the week as a significant portion of U.S. production capacity in the Gulf of Mexico remained shut-in.
Market sentiment was also boosted by expectations that the Fed could be aggressive in its interest rate cuts through the end of the year.
The Fed's actions on the interest rate front, demand in China and other major oil-consuming economies, and the market management policies of the OPEC+ group will continue to dominate the narratives in the oil market and the decisions of traders and large industrial consumers on how to hedge their bets.
By Tsvetana Paraskova for Oilprice.com
Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More