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Hedge funds add fuel to oil price rally with bets on rise above $100

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Hedge funds are piling into the oil market betting that prices will soon pass $100 a barrel, adding impetus to a rally sparked by production and export cuts from Saudi Arabia and Russia.

Riyadh’s extension until December of a 1mn barrel a day oil cut, in addition to further cuts under its Opec+ target, has compounded Moscow’s move to limit exports and pushed prices for Brent crude, the international oil benchmark, to $95 a barrel this week, a fresh high for the year.

Exchange and regulatory data suggested hedge fund positioning had exacerbated the near 30 per cent move higher in prices since June, with a surge in buying accelerating in the past two weeks for both Brent and US crude futures.

The latest data showed that the combined fund net long position in Brent and West Texas Intermediate, the US benchmark, jumped by 137,000 contracts, or 35 per cent, to an 18-month high of 527,000 contracts in the two weeks to September 12.

The figures, equivalent to more than 500mn barrels or about five days worth of global demand, are a widely followed proxy for the activity of speculative players like hedge funds.

Ole Hansen, head of commodity strategy at Saxo Bank, said that hedge fund interest in oil had been reignited by Saudi Arabia’s announcement at the start of this month that it would keep its voluntary production curbs in place longer than previously thought.

“That was the trigger,” Hansen said. “Suddenly everyone realised the market was set to keep going higher in the short term.”

Saudi Arabia’s energy minister defended the country’s decision to further limit production on Monday, saying that global demand for oil may dip if global economic growth slows in the months ahead. 

But analysts said Prince Abdulaziz bin Salman’s stance could yet become a self-fulfilling prophecy: rising prices risk complicating central banks’ exit strategies and hampering global demand for oil. 

Investors are keeping some of their money on the sidelines, wary, like Prince Abdulaziz, of signs of macroeconomic stress in China and a potential period of stagflation in Europe.

Doug King, chief investment officer at RCMA Asset Management — who runs the $300mn Merchant Commodity Fund — said he was not convinced oil would go that much higher as the strength in the market was being driven by Opec+ supply restraint, rather than particularly strong demand.

“The move higher is not massively structural, I think it’s more contrived,” said King. “We’re approaching the upper end of this move in my view, as if we get above $100 a barrel I suspect we’ll see more barrels leak on to the market.”

Other investors were using the options market to hedge against prices passing $100 a barrel before the end of the year. As of Friday, funds had bought about 37,000 call options in WTI — which give investors the right to buy a stock or commodity — expiring in December at a “strike” price of $115, according to Charlie McElligott, an equity derivatives strategist at Nomura. “Hot moves risk bringing in tourist buyers,” he said.

“The march to $100 [a barrel] seems relentless,” said Ehsan Khoman, head of research for commodities at MUFG Bank. “The question is how long does it stay there.”

Ryan Fitzmaurice, head index trader at broker Marex, said that oil currently looked like a “heavily momentum-driven market”, with spot prices for oil moving significantly above those for delivery later in the year, a market phenomenon known in the industry as backwardation.

While funds tend to concentrate trades in the front month, Fitzmaurice said oil producers were selling contracts for later delivery to lock in higher prices for future production.

“That’s resulted in this extreme curve shape,” said Fitzmaurice.

Higher oil prices are already affecting wider stock markets. The Dow Jones US Airlines index has dropped 24 per cent since July 11, with Delta Air Lines and American having slashed their third-quarter earnings forecasts because of rising fuel prices. The S&P 500 Energy index, in contrast, is up 11 per cent over the same period.

Additional reporting by Mary McDougall

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