Why Hedge funds continue to buy oil

Both hedge funds and fund managers in general acquired, through derivatives, the equivalent of 33 million barrels during the past week. Why are they doing it?

The global economy remains in a loop dominated by vaccines, viruses and perimeter closures. The economies of many countries have come to a standstill, even if only partially, and uncertainty remains more alive than ever.

And when we speak of uncertainty we speak both ways. In other words, those who think the economy will get worse have as much uncertainty as those who believe that the economy can only get better.

In this sense, fund managers who have been implementing the idea of investing in oil for weeks could be giving clues about the behavior of the economy

Why are managers buying oil?

It is now the fourteenth week that managers have continued to increase their positions in oil. So there are reasons to think that it is not something temporary. Furthermore, with a total acquisition equivalent to 531 million barrels during this period, this is the largest increase in positions since the first quarter of 2019.

At first glance, the foregoing could lead us to the simple conclusion that managers buy precisely because their expectations about the future of the economy are optimistic. However, this argument could only be the tip of the iceberg.

The main factors that could be influencing are shown below.

  • Optimistic expectations about the economy:The first cause that could be driving purchases by managers and the consequent rise in oil prices, could be optimistic expectations about the economy. However this is not entirely true. Why? Because most of the purchases have been made on WTI oil (United States) and not on Brent (which gives us an idea of ​​the international scene). Therefore, these purchases could be motivated by factors related to the United States and that are related to the stimulus plans promised by Joe Biden.
  • Oil shortages as a consequence of the weather:Another reason could have to do with the expected frosts in Texas. So if production is reduced as a result of the weather and demand is reduced less, does not change or increases, the price of oil will fall. See law of supply and demand.
  • Insufficient production:Finally, another issue that could influence the oil market could have to do with production on a more general level. Since the barrel of oil began its long-term downward trend, some members of OPEC decided to initiate a production cut. Although that production cut is fading over time, if the economy recovers quickly, demand could grow above supply and raise prices.

As we can see, the oil market is exciting, but it also takes into account many factors that could affect it at the same time. Production reductions, changes in the weather or expectations about the economy.

However, managers are mainly buying WTI, so they are probably thinking more about the first two options than the third.


by Abdullah Sam
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