Hedge Funds Slash Oil Futures Positions Amid Slowing Demand and Rising Supply Concerns

Hedge funds and portfolio managers have significantly reduced their long positions in oil futures over the past two months, driven by concerns about slowing global demand and rising supply. The bearish sentiment in the oil market has been exacerbated by weak manufacturing data from China and the United States and the resumption of oil production in Libya. As a result, oil prices have plummeted to a nine-month low, erasing all gains made in 2024, despite OPEC+’s recent decision to delay output hikes.

In the week leading up to August 27, hedge funds and commodity trading advisors were net buyers of the equivalent of 32 million barrels across the six most traded crude and petroleum futures contracts. This buying activity followed a net selling of 48 million barrels during the previous week, according to data compiled by energy analyst John Kemp. However, the recent buying did little to reverse the overall bearish trend, with bullish bets in oil futures more than halved since early July.

Traders remain highly pessimistic about the future of oil prices, primarily due to concerns about global demand, particularly in China, the world’s largest crude oil importer. The market’s mood has also been dampened by the possibility of OPEC+ increasing supply, though the group has opted to delay output hikes for at least another two months. Analysts and traders fear that the market may not be able to absorb additional barrels amid slower-than-expected demand and rising non-OPEC+ supply from countries like the United States, Canada, Brazil, and Guyana.

During the week ending August 27, hedge funds and other portfolio managers increased their long positions in Brent Crude, influenced by a temporary halt in Libya’s oil production due to political tensions. This led to a 31% increase in the net long position, which reached 81,000 lots. However, demand for the U.S. benchmark West Texas Intermediate (WTI) remained subdued. Ole Hansen, Head of Commodity Strategy at Saxo Bank, noted that the combined net long position of 267,000 lots "remains near the bottom of the long-term range" due to weak price action, with traders remaining skeptical about crude’s upside potential amid OPEC+ production increases and China’s sluggish demand. Despite the potential for the Federal Reserve to begin easing monetary policy later this month, market participants remain wary. The expectation that global oil demand has been weaker during the peak summer demand period, coupled with the lack of additional economic stimulus from China, has further fueled bearish sentiment. 

To shift market sentiment, traders will need to see a strong end-of-summer demand reading and signs of falling commercial inventories globally. Without these positive indicators, oil prices are likely to remain under pressure, with traders continuing to question the commodity’s upside potential.