Money managers trading derivatives tied to oil and fuel prices are exhibiting a remarkably pessimistic outlook, reminiscent of the bearish sentiment last seen over a decade ago.

Their cautionary stance indicates their preparedness for a potential recession, which could lead to further declines in contracts associated with crude oil and jet fuel.

Prominent players in the non-commercial sector, including hedge funds, currently hold positions that are close to the most bearish levels witnessed since 2011 across various major oil contracts.

Of particular significance are speculators’ collective perspectives on diesel and gasoil, both crucial fuels for driving economic activity, which are hovering near the lowest levels of optimism observed since the early stages of the Covid-19 pandemic.

Multiple factors have contributed to the prevailing pessimism surrounding the oil market this year. Among these are concerns about the Federal Reserve’s interest rate hikes, anticipated to trigger an economic contraction, and China’s relatively sluggish recovery from its Covid-19 restrictions, failing to meet expectations of a robust rebound.

Moreover, the looming threat of a potential US default looms if politicians fail to raise the debt ceiling, further exacerbating market uncertainty.

Additionally, there is apprehension regarding the possibility that the OPEC+ alliance may not fully deliver on their promised output cuts.

Collectively, these factors present traders with an array of bearish scenarios to consider, leaving them with no shortage of reasons to be cautious.

“It’s pretty remarkable to see this type of positioning,” Greg Sharenow, who manages a portfolio focused on energy and commodities at Pacific Investment Management Co., said in an interview. 

Diverse investment strategies within the non-commercial investor group highlight the various approaches adopted by market participants, ranging from macro-focused hedge funds to algorithm-driven traders who prioritize price momentum and trends. Recent data reveals a slight uptick in positioning for gasoil and US diesel during the past week. Commercial traders, representing producers and other crude merchants, exhibit a less bearish stance, with some even reducing their hedging activities as a precaution against potential price drops.

Nevertheless, the pronounced extent of bearishness among financial traders raises concerns about potential volatility should the Organization of Petroleum Exporting Countries (OPEC) and its allies opt for further production cuts. Such a scenario could trigger a rush to exit bearish bets, leading to a surge in oil prices and exacerbating inflationary pressures.

Goldman Sachs Group Inc. suggests that significant increases in oil prices could prompt trend-following commodity trading advisers to engage in buying activities worth up to $40 billion in US crude and Brent alone, as outlined in a note to clients obtained by Bloomberg. Conversely, the bank’s projections indicate that substantial price declines are unlikely to significantly impact positioning.

While the oil traders’ recessionary outlook is not particularly bold, they are not alone in their predictions. Among the 27 forecasters surveyed by Bloomberg in early May, 22 anticipated a contraction in the US economy within the next year. However, the anticipated timing of the downturn continues to be postponed as the robust labor market fuels wage growth, and the accumulation of savings during the pandemic bolsters Americans’ spending power.

In a broader context, sentiment among global fund managers has turned notably bearish, with Bank of America Corp.’s latest survey revealing that 65% of participants anticipate a weaker global economy, marking the most pessimistic outlook observed this year.