Daily Management Review

Hedge funds are changing the oil market


06/08/2018


Financial investors (hedge funds and other asset managers) markedly reduced their positions on the growth of oil prices after reports of talks between Russia and Saudi Arabia about the increase in oil production. Perhaps they only record profits, but did not change their opinion about the prospects of the market, writes the Financial Times. Yet, their actions, which unfolded the market and lowered the price of the barrel of Brent from more than $ 80 to $ 74, underscore the influence investors can have on the dynamics of prices in the world market in the short term.



John Hill
John Hill
In the first months of this year, fund managers opened a record number of long net positions (defined as the difference between the number of contracts for growth and falling prices); the volume of oil futures and options for oil brands Brent and WTI exceeded 1 billion barrels (and the number of contracts - 1 million). This contributed to the fact that by May, oil has risen to a maximum since 2014, and the cost of Brent even exceeded $ 80 per barrel. The logic of the players was the following: the demand for oil is increasing due to the synchronous growth of the world economy, and its supply and commercial reserves are being reduced by the agreement of OPEC and other states to limit production and reduce investment by large energy companies after the collapse of prices in 2014.

However, hedge funds cut long positions for six weeks in a row. They did it most aggressively at the sixth week, points out Ole Hansen, chief strategist for the commodity markets of Saxo Bank. Over the week to May 29, according to stock exchanges and regulators, investors reduced positions by more than 10% to 823,000 lots, or 823 million barrels, the minimum since September 2017.

Oil fell in price on expectations that at the meeting in Vienna on June 22 and 23, Russia and OPEC could agree on increasing production to compensate for its decline in Venezuela and, most likely, in Iran after the imposition of US sanctions against it, Hansen said. On Thursday afternoon, Brent was trading about $ 76 per barrel.

Once again, this again caused controversy about the impact of hedge funds on the oil market. In the long term its participants are guided by the balance of supply and demand, but most analysts admit the ability of financial players to dictate prices in the short term, the FT notes. Even representatives of OPEC began to meet with hedge fund managers to understand their behavior, although before they called them speculators. 

How to understand when it is worth playing against the market

Some market participants fear that the increase in OPEC production and Russia will stop the price increase only for a while, since few countries have free capacities, but they are not very large either. "We have almost three weeks to meet in Vienna, and volatility [in the market] is almost guaranteed to us," says PVM analyst Tamas Varga.

source: ft.com






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