Hedge Funds Banking on Increased Demand for Petroleum Products

Recent data from the U.S. Commodity Futures Trading Commission suggests that the steep plunge in crude oil last week may have been part of a well-orchestrated plan by hedge fund managers to take out a few or the weaker longs, or to trap them at such high levels that they’ll be forced to sell at unfavorable prices.

The CFTC data suggests that hedge fund managers were busy slashing bullish positons in crude oil well before OPEC and other major non-OPEC producers started hinting last week that they would consider reducing output restrictions.

According to the CFTC, hedge funds and money managers reduced their net long position in the six major petroleum futures and options contracts in each of the five weeks to May 22 by a total of 108 million barrels.

While the major players were realizing profits rather than increasing their long positions on the recent surge to the upside, they continued to add to bullish positions in fuels, especially gasoline, in a bet consumption will remain relatively strong.

This important development will likely prevent crude oil prices from collapsing. The sell-off only serves as proof that traders are having an issue with crude oil supply. Demand for crude oil and demand for gasoline seem to be fine.

Furthermore, it was mentioned several times last week that OPEC and the other major players had to step in to prevent prices from running away to the upside because they feared rising oil prices would slow down economic growth and cause inflation.

If economic growth slows and inflation rises then demand for crude oil and petroleum products could fall and this could eventually lead to another supply glut.

OPEC wants to world to know that it is in control and has the power to raise output just enough to replace supply lost to the turmoil in Venezuela and the sanctions on Iran. And in doing so, it will help bolster the global economy and prevent inflation from slowing down growth.

The hedge fund managers and OPEC strategists seem to be on the same page. Hedge fund managers are buying gasoline because they believe consumption will continue to rise. OPEC is raising output because it is trying to keep crude oil at a price that is more attractive to refiners.

Therefore, it makes sense to me that we could see weaker crude prices and stronger gasoline prices over the near-term.