Money managers intimate a growing confidence that oil prices have room to run higher this year, thanks to expectations of a robust economic rebound and rising global demand for crude.
Last week, hedge funds added the most bullish positions in the oil complex in more than two and a half months, with the net long in crude oil futures jumping to the highest in six weeks.
Rising mobility, the reopening of the economies, and the stimulus packages all point to strong economic growth and consequently, strong oil demand growth. The low-interest rates and the tolerance of the Fed to let inflation run at a moderately above-2-percent level for some time also suggest that investors and speculators will buy more commodities, including oil, as a hedge against inflation.
Hedge funds are looking beyond the immediate COVID crisis in India toward economic recovery in the coming months. This has prompted them to add bullish bets on oil for a third consecutive week in the week to April 27.
During that week, portfolio managers added the equivalent of 30 million barrels in the six most important petroleum futures and options contracts, according to data from exchanges compiled by Reuters columnist John Kemp. This was the biggest weekly bullish wage on oil prices since the start of February.
The combined net long in crude oil reached a six-week high, with WTI Crude leading the increase, while speculators kept an almost unchanged position in Brent Crude, primarily due to an increased amount of naked short selling, Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote in his commentary on the Commitment of Traders reports for the week to April 27.
Overall, commodities are at their highest in ten years. The Bloomberg Commodity Spot Index tracking prices for 23 different commodities, including oil, hit on Tuesday the highest since 2011. The index has rallied by over 70 percent since it hit a four-year low in March 2020.
Although talk of a supercycle in oil has subsided in recent weeks, major investment banks such as Goldman Sachs continue to be very bullish on oil and commodities as a whole, expecting strong economic growth and easy monetary policy to help oil demand to realize its biggest jump ever over the next six months. Goldman sees oil prices hitting $80 a barrel this summer and expects the entire commodity complex to rally by another 13.5 percent over the next six months.
Economies reopening and increased travel this summer are set to boost demand for all major fuels globally, including gasoline, diesel, and even jet fuel, which has shown the slowest recovery so far.
“For the first time in my life, I think traffic jams are beautiful,” Jim Teague, Director and Co-Chief Executive Officer at Enterprise Products Partners, said on the Q1 earnings call earlier this week.
“While economic recoveries aren’t uniform, when you look at the world’s largest economies, demand has moved up, and all indications are that even Europe isn’t far behind,” he added.
Optimism that demand will rebound strongly seem to be shared by hedge fund managers, who have shown with their bullish bets in recent weeks that oil consumption will rise despite the setbacks in large developing economies such as India and Brazil.
Inflationary expectations are also likely to attract more buyers into oil contracts as investors are set to buy more commodities to hedge against inflation risks in their portfolios.
“With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer?term inflation expectations remain well anchored at 2 percent,” the Fed said in its Federal Open Market Committee (FOMC) statement last week.
Oil demand recovery is uneven across economies, but most of those, including the United States, China, and now Europe, are showing signs that they are on track for a major rebound this year, rekindling confidence among money managers that oil prices still have room to rise beyond $70 a barrel.