Investors Became More Bearish on Oil Last Week Than Ever, According to Reuters

By Shariq Khan

Investors displayed an unusually bearish outlook last week, exacerbating a prolonged selloff that pushed oil prices to multi-year lows amid rising fears of weak demand in major consuming nations.

Negative sentiment permeated the oil markets to such an extent that short positions surpassed long positions for the first time, according to data from the Intercontinental Exchange. Specifically, short positions, which are bets on declining prices, reached 164,223 contracts, while long positions, or bets on increasing prices, totaled 151,543 contracts.

"This significant speculative selling pressure has led to a more than $10 per barrel drop in crude prices from late August to this past Tuesday," noted Commodity Context analyst Rory Johnston.

The outlook for oil has dimmed as demand growth has failed to meet the high levels seen in recent years, largely due to economic turmoil in China, the leading importer. Additionally, this year has seen an oversupply in the market, with U.S. oil producers reaching unprecedented production levels.

Brent crude futures dipped below $70 a barrel on September 10, marking the first occurrence below this threshold since December 2021. By Tuesday, prices finished at $72.75 a barrel, down over 20% from this year’s peak of more than $90 a barrel in mid-April.

Hedge funds have shown particular bearishness toward diesel, with prices nearing their lowest levels in three years. Traders from TACenergy reported on Monday that money managers boosted short positions on U.S. ultra-low sulfur diesel futures by more than 12,000 contracts to a total of 65,084 contracts for the week ending September 10.

Ultra-low sulfur diesel futures fell to $2.04 per gallon last week, the lowest price since December 2021, influenced by weak economic activity and an increasing shift towards alternative fuels.

Historically, extreme bearish sentiment in speculative markets can signal that the ongoing decline in oil prices may be approaching its conclusion. Market analysts noted that when many speculators align on one side of the market, it typically leads to a reversal.

While it is difficult to forecast when the sentiment will shift, markets could experience significant volatility once it does. "With a substantial amount of short interest, a reversal could lead to rapid price increases," TACenergy indicated.