Portfolio investors sold oil-related futures and options contracts at the fastest rate for almost six years as traders prepared for the onset of a recession driven by tighter credit conditions in the aftermath of the banking crisis.
Hedge funds and other money managers sold the equivalent of 142 million barrels in the six most important contracts in the seven days ending on March 21, after selling 139 million barrels in the week to March 14.
The fund community liquidated 163 million barrels of previous bullish long positions in the two most recent weeks, while establishing 115 million barrels of new bearish short ones. In absolute terms, the change in positions over the two most recent weeks is one of the largest to occur in either direction in the last decade, three times more than average, implying a fundamental change in the outlook.The banking crisis, which has resulted in the failure of several U.S. regional banks and the enforced rescue of Credit Suisse by UBS, is expected to result in a marked tightening of credit conditions.
At the same time, Russia’s crude and diesel exports have continued uninterrupted, despite sanctions imposed by the United States and its allies, contributing to near-term supply in crude and product markets. The previously expected tightening of the production-consumption balance has been pushed further back into the second half of 2023.
Ultra-low prices are likely to compel a slowdown in new drilling and well completions as well as encourage more gas-fired power generation at the expense of the remaining coal units.
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