Hedge funds and other asset management companies have never been so pessimistic about the outlook for oil prices, and energy analyst John Kemp said there are increasing signs that major industrial economies are losing their growth momentum. Investors have also concluded that Saudi Arabia and its OPEC+allies have no choice, cannot or will not further limit their production to offset the slowdown in consumption growth and the decline in oil prices.

In the seven days ending September 10th, hedge funds and other fund managers sold the equivalent of 128 million barrels of crude oil in the six most important futures and options contracts. In the past 10 weeks, fund managers have sold oil for 8 weeks, reducing their holdings by a total of 558 million barrels since early July.

The net short position held by the fund is 34 million barrels, while on July 2nd, it held 524 million barrels of net long position, which is the first time in history.

In the past week, crude oil sales have been strong in all aspects, led by Brent crude (-54 million barrels), but including New York Mercantile Exchange (NYMEX) and ICE WTI (-27 million barrels), European gasoline (-20 million barrels), US diesel (-15 million barrels), and US gasoline (-11 million barrels).

In the past nine weeks, fund managers have sold Brent crude for seven weeks, reducing their positions by a total of 213 million barrels since July 9th. The fund holds a net short position of 13 million barrels in Brent crude oil, while nine weeks ago it held a net long position of 200 million barrels, marking the first time on record.

The fund manager also holds a record breaking net short position of 48 million barrels in European natural gas and a near record net short position of 39 million barrels in US diesel.

Even WTI crude oil and gasoline, which have less pessimistic market sentiment, have positions only a few million barrels higher than historical lows.

In the important WTI crude oil contract of NYMEX, fund managers have increased their short positions by 61 million barrels in the past four weeks.

The bearish positions on oil have become very crowded, and the accumulation of short positions is creating conditions for a significant increase in oil prices, if the news becomes less negative.

But currently, investors are focused on the limited options of OPEC+to cope with the deteriorating economic outlook.

Despite the benchmark oil futures prices falling to their lowest level since early 2021, investors remain unusually pessimistic.

After adjusting for inflation, crude oil prices have fallen to the level of major economies during the pandemic, when the first successful vaccines were announced.

In September of this year, the average inflation adjusted oil price was $72 per barrel, the 35th percentile for all months since the turn of the century, while the recent high in April was $90 per barrel (the 57th percentile).

The decline in oil prices sends an increasingly strong signal that it is necessary to further slow down production growth to match the deteriorating macroeconomic environment and deteriorating consumption prospects.

Since October 2022, Saudi Arabia and its OPEC+partners have announced production cuts of 5.66 million barrels per day to reduce excess inventory and drive up oil prices.

Recently, the organization has been trying to relax some of its production reduction measures, but due to a slowdown in consumption and another sharp drop in prices, it has been forced to postpone the planned increase in production.

The conclusion drawn by investors is that the organization has no intention of further reducing production in the short to medium term.

Therefore, the burden of adjustment must fall on competing producers in the United States, Brazil, Canada, and Guyana, who have contributed almost all of the increased production in recent years.

Oil prices will fall until they further slow down drilling and production by US shale oil producers, the most price sensitive suppliers in the short term.

Continuous daily chart of Brent crude oil