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In yet another sign that paper oil markets may be overly complacent about the extent of Middle East supply disruptions, trades have strengthened their short positions in oil futures for most of the past two months.
Since early April, portfolio managers have increasingly bet on lower oil prices, according to the latest available commitment of traders (COT) data from exchanges on June 2.
Brent Crude shorts tripled between late March and early June, according to data compiled by an energy analyst John Kemp.
From June 2, short positions in Brent crude oil had risen to its highest level since January, when the U.S. ousted Venezuelan leader Nicolas Maduro, and markets expected more supply from Venezuela in the coming months.
A surge in short positions and weeks of long selling over the past eight weeks suggest investors are betting that supply will soon recover.
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Paper markets play on hopes, expectations, emotions and fears, and the sum total of all of these currently appears to be a reluctance of the hedge fund and portfolio manager community to bet on a summer of real physical supply shortages.
However, the paper market may soon face the reality of crumbling global inventories, including in the United States, where stocks in Cushing, a shipping point WTI crude oilare just a few weeks away from going down to minimum operating level.
Too much noise about the cease-fire, which is tested almost daily with one strike or counterstrike after another, does not help the paper market, which may have disengaged from too large a supply loss.
Traders react to any sign of an « imminent deal » selling and start buying oil futures again when Israel strikes Lebanon, US « self-defense » strikes against Iran or Iranian strikes on regional infrastructure threaten to unravel the fragile ceasefire.
The players in the paper market are always waiting for an immediate solution and the reopening of the Strait of Hormuz, which would flood the market with oil. And that has been their wish for three and a half months now.
The point is that even a complete opening of the strait would not lead to immediate relief for buyers. Firstly, ship owners and transport operators must have guarantees that they will not be caught again by stranded tankers. Then the oil cargoes need weeks to reach buyers – weeks that the market may not have in the midst of the peak summer season.
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