Commodity-linked investments have become attractive again in recent weeks as traders increasingly believe the U.S. economy could pull off a soft landing even as interest rates are at their highest in 22 years.
Oil prices just booked in July the biggest monthly gain since January 2022 the best July performance in nearly two decades. Oil hit a three-month high earlier this week, amid slowly growing optimism about resilient oil demand, as well as falling supply due to the production cuts from OPEC+ and Saudi Arabia.
Money managers have grown increasingly optimistic about a recovery in oil prices and have raced to close out bearish bets on petroleum futures over the past month. Over the past few weeks, hedge funds have slashed short positions and added fresh longs, expecting a tighter market this summer and an improved macroeconomic picture in the United States.
Oil market participants seem to have shaken off the doom-and-gloom sentiment, or as Goldman Sachs analysts wrote in a note at the end of July, “The market has abandoned its growth pessimism.”
Amid easing concerns about the global economy, exchange-traded funds (ETFs) tracking commodity indexes also saw inflows in July, following four consecutive months of withdrawals.
The inflows in July, only the second month of commodity ETF inflows so far this year, stood at $361 million into 20 ETFs tracking commodity indexes, data compiled by Bloomberg showed this week. February was the only other month of 2023 so far that saw inflows into the 20 ETFs cross-commodity ETFs, according to the data from filings compiled by Bloomberg. Related: Bullish Momentum Is Building For Crude
Since the spring of 2022, commodity ETFs have seen a lot of outflows as investors feared recessions with the aggressive interest rate hikes.
But recently, those investors and traders have returned to investing money again in funds linked to commodity indexes, in a sign that fears of recessions have somewhat subsided.
“Asset allocators have started rotating back into commodity index ETFs,” Ryan Fitzmaurice, lead index trader at commodities brokerage Marex Group Plc, told Bloomberg.
Across commodity markets, open interest hit a 13-month high as of the end of July, JPMorgan Chase analysts wrote in a note earlier this week. In energy commodities, the open interest was $566 billion as of July 28, while all commodity markets had $1.31 trillion in open interest.
“Our economists note that positive surprises on growth and inflation are spurring soft-landing hopes, and we continue to see commodities as an under-loved asset class,” JPMorgan analysts wrote in a note carried by Bloomberg.
In energy commodity markets, the near-term oil market fundamentals and eased concerns about the global economy have made investors and speculators more bullish on crude and fuels in recent weeks.
Oil demand is more resilient than feared, according to Goldman Sachs. Global oil demand reached a record high of 102.8 million bpd in July, the bank’s analysts said.
Judging from the hedge fund positioning in the reporting week to July 25 and the four weeks prior, market participants started to expect oil prices to move higher as Saudi Arabia began its unilateral cut of 1 million bpd for July and August. The Kingdom has just announced it would extend the voluntary output reduction into September.
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“Crude prices rallied after the Saudis did what everyone expected them to do, they extended output cuts. The Saudis are doing whatever it takes to defend oil prices and that could mean we could be seeing $90 oil soon,” Ed Moya, senior market analyst at OANDA, said on Thursday after Saudi Arabia signaled that the cut could be further extended or even deepened.
“The short-term crude demand outlook should hold up as it is clear as day that the US economy is weakening, albeit at a slow pace.”
By Tsvetana Paraskova for Oilprice.com
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