By Shariq Khan
In a historic turn of events, investors have become more bearish than ever on oil, leading to a months-long selloff that has pushed prices to multi-year lows. The negative sentiment has been fueled by concerns of weak demand in top consuming nations, resulting in short positions overtaking long positions for the first time, according to data from the Intercontinental Exchange (NYSE:).
The massive speculative selling pressure has caused a more than $10/bbl collapse in crude prices between late-August and this past Tuesday, as noted by Commodity Context analyst Rory Johnston.
The outlook for oil has darkened as demand growth has failed to meet expectations, with turmoil in China's economy and record-high oil production in the U.S. adding to the oversupply woes. Brent crude futures settled below $70 a barrel on Sept. 10 for the first time since December 2021, closing at $72.75 a barrel on Tuesday, down over 20% from this year's peak.
Hedge funds have been particularly bearish on diesel, with prices hitting their lowest levels in three years. Money managers increased short bets on U.S. ultra-low sulfur diesel futures, dragging prices down to $2.04 per gallon last week, the lowest since December 2021.
Despite the record-low sentiment in speculative markets, market participants believe that the slump in oil prices may be nearing its end based on historical patterns. Extreme positions by speculators are often reliable contrary indicators, signaling a potential reversal in the market sentiment.
While it is hard to predict when this reversal will occur, market experts warn that sharp volatility could be expected when it does, with fast price spikes likely to follow as the bidding resumes.
Analysis:
The recent bearish sentiment in the oil market has led to a significant selloff, with prices plummeting to multi-year lows. The oversupply of oil, weak demand, and economic turmoil have all contributed to the downward pressure on prices. However, market participants believe that the extreme bearishness in the market could signal a potential reversal, leading to sharp volatility and fast price spikes in the near future. Investors should closely monitor the market dynamics and be prepared for potential fluctuations in oil prices.