Hedge funds and other portfolio managers began to include a higher risk premium in their oil price trades early this month as tensions in the Middle East spiked.
Money managers significantly boosted their long positions in crude oil and other major petroleum product contracts in the weeks preceding Iran’s drone attack on Israel this past weekend.
As the geopolitical premium jumped before the attacks, raising buying in oil futures contracts, it’s not so surprising to see Brent Crude prices lingering just below $90 per barrel, without a spike in prices, since this weekend’s Iranian attack. Most traders had already priced in the higher geopolitical risk premium in the days preceding Iran’s response to the Israeli hit on an Iranian diplomatic mission in Syria.
Hedge funds were pricing in some sort of Iranian retaliation, which coupled with expectations of healthy oil demand this year and the OPEC+ group’s continued production cuts to make money managers more bullish on the most important contracts in crude and petroleum products.
So they were net buyers of the equivalent of 32 million barrels in the six most important petroleum futures and options contracts in the week to April 9, according to data from exchanges compiled by Reuters columnist John Kemp. The entire oil complex saw extended net long positions – the difference between bullish and bearish bets – in the week preceding Iran’s attack against Israel.
European gasoil futures and WTI saw the biggest rises in net positions in the week to April 9, but Brent Crude, U.S. diesel, and U.S. gasoline also saw an uptick in bullish positions, according to the data. Related: World Oil Demand Jumped To 5-Year Seasonal High in February
All crude and fuel contracts saw net buying with the combined net long reaching a fresh two-year high at 728,000 contracts, with the bulk being held in the two crude oil contracts WTI (238,000 contracts) and Brent (304,000 contracts), Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote this week in an analysis on the latest positioning in commodities. The bullish positioning in Brent Crude hit a two-and-a-half-year high while RBOB gasoline saw the highest net long in more than three years, Hansen added.
“Crude prices already included a risk premium, and unless the market faces a real disruption to supply, the risk of an upside spike towards USD 100 remains limited,” the strategist noted.
“All eyes now on Israel, and their response, especially after President Biden urged restraint and after Iran said they do not intend to continue strikes.”
The crude oil net long in WTI and Brent reached a six-month high in the week to April 9, driven by Brent – the international contract most exposed to geopolitical events. Brent Crude has seen the net long position triple since early December, just before the Houthi attacks on commercial vessels in the Red Sea started adding higher geopolitical risk to oil prices, Hansen added.
The net long position in fuels hit a two-year high amid rising demand and a tight fuel product market driven by Russian refinery disruptions following Ukraine’s drone attacks and signs of improving manufacturing data in the U.S., Europe, and China, Saxo Bank’s Hansen said.
“Brent crude oil has settled into a nervous trading range around USD 90, between USD 88.75 and USD 92, with news from Israel and Iran providing most of the intraday volatility,” he added.
The positioning of the hedge funds and other money managers is not too extreme, Reuters’s Kemp comments, which suggests that the market isn’t too lopsided to the bullish side and limits the risk of a sharp correction in prices.
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Analysts are not ruling out a run to $100 oil, but note that it would take further escalation in the Middle East with a direct threat to oil supply from the region for oil prices to spike to triple digits.
By Tsvetana Paraskova for Oilprice.com
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