By Jessica Summers and Meenal Vamburkar
Hedge-fund bets on rising Brent crude hit a fresh record as tension in the oil-rich region escalated, sending prices to their highest in more than two years. Bets on rising West Texas Intermediate, the U.S. benchmark, reached the highest level since March. Disruptions in exporters Libya, Nigeria and Venezuela in past months hadn’t fazed investors enough to trigger strong rallies, but Saudi Arabia and Iran? That’s another story.
“Most of the political risk has been smaller-scale,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by telephone. “But when you start talking Saudi Arabia and Iran, that gets people’s animal spirits flowing.”
Saudi Arabia and Iran not only churn out almost 14 million barrels a day of crude, or more than 40 percent of production from the Organization of Petroleum Exporting Countries, but they are also rival regional powers behind major Middle Eastern conflicts.
In a move that’s shocked the world, Saudi ministers and billionaires have been arrested in an anti-corruption drive as Crown Prince Mohammed bin Salman consolidates his power. The young leader’s crusade against Iranian influence has already stoked a war in Yemen and the isolation of Qatar and now raises the specter of war in Lebanon.
Lebanon’s Prime Minister Saad Hariri — a pro-Saudi politician — abruptly resigned this month, issuing a statement in Riyadh blaming Iran for meddling in Lebanon’s affairs via its proxy, Hezbollah. Saudi nationals have been advised to leave the country. Adding to the unease, Israeli leaders say they’re ready to bomb Lebanon back to the Stone Age to counter Hezbollah’s military buildup.
“Investors came racing in with the geopolitical risk premium on the rise,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, by telephone. “The tensions that were on full display really added” to the “bullish fervor.”
Front-month Brent contracts are increasingly trading at a premium to later-dated ones, a market structure known as backwardation that signals strong demand. Brent futures for December 2018 were $2.27 higher than the December 2019 contracts on Monday.
Hedge funds raised their Brent net-long position — the difference between bets on a price increase and wagers on a drop — by 2.4 percent to a record 543,069 contracts in the week ended Nov. 7, according to data from ICE Futures Europe. Longs surged by 2 percent to an all-time high, while shorts tumbled 2 percent to the lowest in more than eight months.
The WTI net-long position increased 13 percent to 317,806 contracts, according to the Commodity Futures Trading Commission. Shorts fell by 23,258 futures and options to 82,986.
The record positioning “is not surprising because when you think about it, nothing has changed either fundamentally or sentiment-wise to take away this bullish attitude,” Ashley Petersen, lead oil analyst at Stratas Advisors in New York, said in a telephone interview. “I wouldn’t be surprised to continue seeing this kind of movement as long as we’re not getting any negative news from the OPEC members until the meeting.”
Should any outcome from OPEC’s Nov. 30 meeting not satisfy investors, that could lead to a reversal in positioning, according to Tamar Essner, an energy analyst at Nasdaq Inc. in New York. “Disappointment could be defined as: OPEC did exactly what they telegraphed they were going to do, but nothing more,” he said by telephone.