The oil outlook began to rise last week, with business activities and growing hopes that a successful coronavirus vaccination program would enable an early start of the journey.
Hedge funds and other currency managers made purchases of the equivalent of 69 million barrels in the six most important oil futures and options contracts in the week ending November 17, according to currency position data.
Portfolio managers have purchased a total of 182 million barrels in the past two weeks, increasing their total positions on six contracts to 539 million, the highest since the beginning of September.
Last week’s purchases mostly consisted of the creation of new long bullish positions, unlike the previous week, when purchases were driven by the need to close old short positions on the downside.
As hopes for a vaccine-induced recovery in oil consumption grew, fund managers, who started from a pessimistic base, behaved far less bearish and more bullish against crude oil and fuel prices.
Even after the recent buying wave, the net position of the hedge fund community in the crude oil market was still only in the 44th percentile for all weeks since the beginning of 2013, while the net position in oil products remained at the 48th percentile.
Crude positions rose to their position just four weeks ago and were still well below where they were at the end of the second quarter and the start of the third quarter.
This shows that if news about vaccine trials and distribution continues to be encouraging, there is still plenty of room for fund managers to increase their bullish position.
Brent spot prices and calendar spreads have continued to strengthen in recent days, indicating that more purchases have likely entered the market since the positions were reported last Tuesday.
As the market expects an improvement in the consumption outlook in 2021, the acquisition of funds may accelerate and possibly support the increase in prices.
The main danger is that traders mispredict the rate at which successful vaccine trials and community-wide vaccination practices are transforming into normal business performance and the resumption of international aviation.
For now, the price risk balance is likely still looking upwards, with the potential to create more positions in the short term.
However, prices will become increasingly vulnerable to a temporary recovery if market participants become less optimistic about the timeline and its impact on oil demand.