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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Extreme Market Volatility Spares Crude Oil Sector

  • The Fed’s move to increase interest rates to combat inflation has fueled volatility across nearly all asset classes.
  • Oil and energy stocks have outperformed the greater market.
  • Brent Crude could spike to $125 a barrel next year if China eases its Covid policies, Goldman Sachs said in a note last week.
Oil Barrels

Actively managed exchange-traded funds (ETFs) are long on crude oil this year and some have seen their managed-futures funds rising in a market that has seen extreme volatility in nearly all asset classes. The major shift from years of low inflation and low interest rates to inflation at a 40-year high and aggressive rate hikes from the Fed has led to declines in many major asset classes. But not for the managed futures ETFs, which seek to emulate the trades of market trend-following quant hedge funds.  

A big shift is taking place in the market due to high inflation and high interest rates now, and commodity trading advisors (CTAs), or managed futures, are one of the few winners.  

CTAs are not investing in commodities only.  

“The modern term is managed futures. And it’s because they invest in futures contracts,” Andrew Beer, who co-runs the iMGP DBi Managed Futures Strategy ETF (NYSEARCA: DBMF), told CNBC’s ETF Edge program earlier this month.

“In regulatory land, futures contracts are often treated as commodities, but we call them managed futures,” Beer said.

“Huge Regime Shift” In Markets

Managed futures funds try to replicate the trades of the biggest managed futures hedge funds and go long or short on futures contracts across commodities, equities, fixed income, and currencies. 

“CTA hedge funds try to capitalize on big shifts in the market. And right now we’re in the middle of a huge regime shift,” DBMF’s Beer told CNBC. “We went from this low inflation world to one with high inflation.”

The iMGP DBi Managed Futures Strategy ETF is up over 23% year to date to November 14. The active ETF is currently long on crude oil and short on nearly everything else, CNBC host Bob Pisani noted. 

DBMF’s strategy of uncorrelated plays in a very volatile market this year has helped its hedge fund advisory firm and asset manager Dynamic Beta investments (DBi) reach $2 billion in assets under management (AUM) in October.

“Our products provide investors with accessible, diversified, uncorrelated, low-fee exposure to hedge fund replication strategies, and we are optimistic that more and more investors and advisors will see the value of this exposure,” Beer, Managing Member of DBi, said in a statement last month.

Since the Russian invasion of Ukraine rattled markets and the energy crisis and supply chain issues fueled inflation globally, uncorrelated strategies via managed futures funds have seen gains this year, compared to the S&P 500 index, which has slumped 17.5% year to date to November 14.

So investors have been increasingly seeking uncorrelated and diversification strategies, and in a high-inflation world, it looks like managed futures funds are winning.

For DBMF, one of the biggest plays this year has been long crude oil.  

Oil And Oil Stocks Rise 

Despite being off their highs from earlier this year, crude oil prices are still up year to date, and analysts do not rule out a new move up to above $100 per barrel, barring severe oil demand-crippling recessions.  

The Energy Select Sector SPDR Fund (NYSEARCA: XLE), which tracks the S&P 500 energy sector, has gained a massive 63% year to date as crude oil and oil stocks rallied.

In fact, the energy sector is the only major sector with gains in the S&P 500 this year, massive gains at that, at 68.5% year to date to November 14, according to market data compiled by Yardeni Research. Within the energy sector, Integrated Oil & Gas has jumped by 77.1%, Oil & Gas Equipment & Services by 62.5%, Oil & Gas Exploration & Production – by 68.8%, and Oil & Gas Refining & Marketing is up by 74.4% year to date.  

Despite global economic headwinds and the still uncertain Chinese recovery due to Beijing’s Covid-management strategy, near-term risks in oil are skewed to the upside, many analysts say.

Related: U.S. Levies Sanctions On Network Supplying Russia With Military Tech


“A pickup in Chinese demand, despite the current headwinds from rising virus cases, when EU is preparing sanctions against Russian oil and OPEC+ is cutting production, will likely lead to further tightening of the market,” Saxo Bank’s strategy team said on Monday.

Brent Crude could spike to $125 a barrel next year if China eases its Covid policies, Goldman Sachs said in a note last week carried by Business Insider. Goldman’s current forecast for Brent for 2023 is at $110 per barrel, but there is a lot of upside risk due to possible supply disruptions in Russia, Libya, Iraq, and Iran.

“The risk distributions around our current oil forecasts are skewed squarely higher given spot demand continues to realize robustly,” Goldman Sachs said.

Just after the OPEC+ decision to cut supply, another bank, Morgan Stanley, said in early October that oil prices would rise again to $100 per barrel faster than previously estimated, and lifted its price forecast for the first quarter of 2023 to $100 from $95 per barrel.

By Tsvetana Paraskova for Oilprice.com

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