Energy sector allocation by major hedge funds
Several hedge funds, geared towards a macro strategy—like Euclid Advisors and Graham Capital Management, have significant exposure to the energy sector.
Hedge funds lower net long positions in Brent crude
After a massive accumulation of positions in oil during May, where investors were chasing a resurgence in oil prices, quite a few hedge funds have lowered their net long positions in futures and options holdings in Brent crude over the past few months. ANZ stated that net long positions in WTI (West Texas Intermediate) crude were lowered by more than 5% by US speculators over the last week.
Longer-term oil contract prices also fell
Prices of longer-term oil contracts tend to be less volatile than those for immediate delivery. However, these longer-term contracts—like those for December 2017—saw a price erosion of $5 per barrel, or about 8%, earlier this week. This week, the activity impacted both ends of the futures curve in relatively equal measure. This probably indicates that investors across the entire curve are calling it off on oil.
Fundamental factors contribute to the fall in oil
US oil inventories experienced a rise for the second time in the past couple of months. WTI crude oil is close to its lowest level in the last three months. It slipped to ~$52 per barrel, following the inventory news release on Wednesday. Also, US drilling staged a rise. It rose after falling for 29 weeks. This adds to the pressure on crude oil prices. It’s negative for oil firms.
Faltering Chinese growth could impact crude oil demand
Chinese equity markets have shed more than $3.5 trillion within a month. China is the world’s second-largest oil consumer. It has taken reasonable steps to stabilize the market, including expanding the margin requirements pertaining to sell orders. A resulting slowdown in Chinese growth could negatively impact the demand for crude oil.
These factors spell short-term gloom for independent oil companies like Anadarko Petroleum (APC), EOG Resources (EOG), and Occidental Petroleum (OXY). They’re also negative for integrated firms like ExxonMobil (XOM). As we discussed earlier, energy ETFs like the iShares US Energy ETF (IYE) have suffered weekly losses due to global macro events and oil fundamentals.
In the next part of this series, we’ll discuss reasons why things aren’t that gloomy for oil.