A logo is displayed on the hardhat of a worker at the Royal Dutch Shell Plc processing facility in Loving, Texas, U.S., on Friday, Aug. 24, 2018. Royal Dutch Shell Plc came through a quarter of volatile oil prices to beat earnings estimates, delivering a surge in cash flow the company said will underpin "world-class" returns to investors. Photographer: Callaghan O'Hare/Bloomberg
Royal Dutch Shell, a behemoth of the physical oil trading industry, has a hands-on view of the underlying state of the market © Bloomberg
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If you only looked at hedge fund activity in the oil market you could be forgiven for thinking the mood was turning bullish. In the past 10 weeks hedge funds have added almost 400m barrels of long positions in crude and refined products — equivalent to four days of global demand — in a bet that last year’s sell-off was overdone.

US sanctions on Iran and Venezuela, robust demand growth and hopes that the US-China trade spat will soon be resolved, have all contributed to crude’s steady rise back to near $68 a barrel, almost $20 above its lows in December.

But talk to some of the biggest physical traders in the industry — from Royal Dutch Shell to Glencore — and you quickly hear a more nuanced story. These behemoths of the physical oil trading industry, which have a hands-on view of the underlying state of the market, all sound remarkably cautious about the outlook.

At this week’s FT Commodities Global Summit in Lausanne, Switzerland, executives who oversee trading volumes of at least 30m barrels of oil each day in the 100m b/d market, all appeared to have severe doubts that prices would move a lot higher.

Take Glencore’s Alex Beard, the billionaire head of the mining and trading group’s oil operations. While acknowledging that demand has been buoyant, he said that a run at last year’s peak of $86 a barrel was unlikely.

“I think the market is going to struggle to get back to those levels,” Mr Beard said.

Mark Quartermain, Shell’s crude oil trading head, said the market was stuck in a $60-$75 a barrel range, while Trafigura’s co-head of oil, Ben Luckock, said he was at best “gently bullish” but did not see prices going much above $70. Current levels are “relatively sensible”, he said.

There are good reasons for their caution. Most expect the US shale industry to keep expanding, with Mr Beard arguing the industry anticipates an additional 1m b/d of US exports in the second half of this year.

Others see the threat coming from US President Donald Trump, whose tweets calling for lower prices and attacking Opec have become commonplace. With an election next year, Mr Trump is expected to ratchet up the pressure on oil-producing allies, such as Saudi Arabia, not to let prices run away.

Opec’s production cuts, along with the sanctions hitting Iran and Venezuela, have tightened supply but there is still little panic among physical traders about real shortages.

Hedge funds may, of course, choose to ignore all this. Indeed, physical traders are often on the other side of the trades that commodities funds put on. But the fact remains that the industry is far from overwhelmingly bullish on the outlook.

david.sheppard@ft.com

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