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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Hedge Funds Scramble To Buy Crude Oil Futures As Market Tightens

  • Hedge fund speculators are having a heyday in oil markets, betting big on even higher crude prices in the short-to-medium term. 
  • Demand for oil is set to continue rising in the months to come.
  • Supply, meanwhile, remains constrained, and it’s not just OPEC+’s fault

Earlier this year, oil began to fall out of favor with traders as the focus on energy attention increasingly shifted towards renewable power and the energy transition. But then last month, an energy crunch squeezed Europe. It then spread to China and India, and now there are warnings that it may make its way to the U.S.  And the price of oil has gone flying.

Speculators Rush into Oil as Energy Crunch Worsens

Reuters’ John Kemp reported in his latest weekly column on hedge fund oil buying that large oil speculators had purchased the equivalent of 42 million barrels across the most traded oil and fuel contracts last week, bringing the total for the last six weeks to 170 million barrels. This, Kemp noted, reversed more than half of net sales totaling 268 million barrels accumulated over the previous ten weeks.

The buying is set to continue this week, too unless speculators decide to take profits, after yesterday OPEC+ decided to not add more barrels to its monthly production boost of 400,000 bpd despite calls to do so from the IEA and Washington. There had been reports OPEC+ might add 800,000 bpd in November and no barrels in December, but the group eventually decided to keep the rate of additions unchanged.

Related: WTI Crude Oil Price Hits 7-Year High

As a result, Brent crude ended trade on Monday at over $81 per barrel, with West Texas Intermediate at close to $78 per barrel. At the time of writing, both were still higher after dipping slightly following the first reaction of the market to the OPEC+ announcement.

Demand for oil is set to continue rising in the months to come, not only because of the continuing global economic recovery but because of the energy crunch that has sent natural gas prices so high it is now cheaper for some utilities to switch to oil derivatives from gas to generate electricity. According to Aramco, this crunch could see additional oil demand of half a million barrels daily.

Supply, meanwhile, remains constrained, and it’s not just OPEC+’s fault. U.S. oil producers have shown remarkable restraint amid recovering oil prices as they prioritized shareholder returns over production growth. And this priority will remain, according to the chief executive of Pioneer Natural Resources.

“Everybody’s going to be disciplined, regardless whether it’s $75 Brent, $80 Brent, or $100 Brent,” Scott Sheffield told the Financial Times. “All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies.”

“I don’t think the world can rely much on US shale,” he said. “It’s really under Opec control,” he added.

No wonder, then, that short positions on oil have fallen to the lowest since late 2019, Reuters’ Kemp reported, while new bearish positions added 41 million barrels of oil equivalent over last week. This may continue this week, too, as there are precious few bearish factors at play for oil right now.

Related: The Real Reason OPEC+ Refused To Boost Production Further

It’s true that Britain’s PM has declared that all electricity in the country would be generated from clean energy sources by 2035 and that the European Parliament has urged the Commission to reduce the EU’s dependence on Russian gas, but for now, these are both in the realm of wishful thinking rather than reality.

Short-Term Outlook For Oil Prices Remains Bullish

In other words, the short-term outlook for oil prices is rather bullish. A nuclear deal between the U.S. and Iran could limit the upward potential for oil, but that deal is still far from certain as the two sides have yet to meet again for another round of negotiations.

A change of priorities in U.S. shale would also have a bearish effect on prices but based on what Pioneer’s CEO told the FT, this is unlikely to happen, at least among the public companies in the field. Smaller, private independents could boost production to take advantage of the price trend but just how fast this would affect global prices remains to be seen.

By Irina Slav for Oilprice.com

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