Hedge funds curb bets on oil rally amid political unrest
Money managers curbed their enthusiasm for oil just before the US benchmark price surged to almost US$70 ($99) a barrel.
Total wagers on West Texas Intermediate crude slid to the lowest since early January, with bets that it will rise shrinking for a second week. That was days before Iran accused President Donald Trump of “bullying,” while the US signalled it’s preparing to pull out of a nuclear accord that’s allowed OPEC’s thirdlargest producer to export more crude.
Hedge funds could be proven right in the longer run, though, if tensions subside and the market’s focus shifts back to abundant American supplies.
“They may have missed a little bit of a run,” said Nick Holmes, an analyst at Tortoise in Kansas, which manages US$16 billion in energy-related assets. “But if they were long over the last four to six weeks, they’ve done quite well as some of the geopolitical risk and tensions have escalated.”
Crude futures in New York have rallied more than 15 per cent so far this year and money managers’ bullish stance on the benchmark is still near double the levels seen in October.
Less than two weeks before a May 12 deadline for Trump to decide on sticking to the nuclear deal or walking out, Israeli Prime Minister Benjamin Netanyahu said his country has half a ton of Iranian documents that prove Tehran had a secret program to build nuclear bombs.
Yet, Iran’s foreign minister Javad Zarif said there is only one way forward: US compliance with the agreement.
“This market is just solidly all bulled up,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund. That’s largely due to “geopolitical hedging.”
Amid the Iran risks, some banks are calling for higher oil prices.
Bank of America Merrill Lynch expects the global Brent benchmark to exceed US$80 this quarter. Some oil options traders are even betting that Brent will top US$90 a barrel in the fourth quarter.
The US’s take on Iran sanctions is the key price- driver, according to Standard Chartered Plc. The market has priced in more than a 50 per cent probability that the US’s waiver against Iran won’t be extended, but there’s still “significant upside” should the waiver lapse, the bank said.
Hedge funds reduced their WTI net-long position — the difference between bets on a price increase and wagers on a drop — by 3.5 per cent to 418,047 futures and options during the week ended May. Longs fell 3.3 per cent to the lowest in four months, Shorts dipped 1.2 per cent.
Aside from political woes, oil may have rallied a little too fast when considering the state of supplies in the US. The nationwide oil rig count in the US has increased for a fifth straight week. — Bloomberg