Morgan Stanley: Oil Traders Are ‘More Precise’ With Risk as Wars Drag On
Morgan Stanley says heightened uncertainty around the conflicts in Iran and Ukraine has pushed many oil traders away from longer-dated futures and into contracts maturing within three to six months. The bank's trading desk reports that the shift has reduced liquidity in longer-term contracts while speculative bets on refined fuels have risen sharply.
Why It Matters
This repositioning concentrates market risk into near-term maturities and can amplify short-term price swings, while growing bullish bets on gasoline and diesel signal tighter fuel markets and potential further draws on U.S. inventories.
Key Facts
- source: Michael Kern for Oilprice.com
- institution: Morgan Stanley
- speaker: Brendan Ross, Co-Head Global Oil Trading at Morgan Stanley
- event: Asia Pacific Petroleum Conference in Singapore
- trader-time-horizon: Most traders now bet on futures within a three to six-month period
Traders are increasingly avoiding longer-dated oil futures as volatility and uncertainty tied to the conflicts in Iran and Ukraine have risen, Morgan Stanley said. Market participants are shortening their horizons and concentrating bets in contracts maturing within three to six months rather than taking positions further out the curve.
Brendan Ross, Co-Head of Global Oil Trading at Morgan Stanley, told delegates at the Asia Pacific Petroleum Conference in Singapore that market participants have become more selective about where they take risk and are trimming exposures that could turn into unexpected losses. That reallocation into near-dated contracts has, according to Morgan Stanley, drained liquidity from longer-term futures.
At the same time, speculators and portfolio managers have been increasing exposure in refined fuel markets, which are noticeably tighter than crude. Hedge funds flipped from net short on fuels earlier in the spring to a net long position across gasoline and diesel; data compiled by energy analyst John Kemp show a combined net long of 177 million barrels in the most traded fuel contracts as of September 1.
Analysts say the bullish posture on fuels is likely to persist because lost output from the Middle East and Russia cannot be readily replaced given limited spare production capacity elsewhere. As a result, U.S. stocks of diesel and especially gasoline are expected to keep drawing down from already low levels, reinforcing pressure in refined product markets.
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