Oil hedge funds continue to find themselves stuck between a rock and a hard place, or rather, according to Reuter’s senior market analyst John Kemp, between sanctions and a potential global recession.
He notes that hedge funds have held relatively unchanged petroleum positions the previous nine weeks.
Kemp says this is “unusual and implies fund managers have few strong convictions about the direction of crude or fuel prices.”
Western sanctions against Russia have reduced the global oil supply, but a similar decline in demand offsets this decrease. European consumption has not rebounded to pre-COVID levels, and renewed COVID lockdowns in China are causing concern over future demand.
Economic forecasts look increasingly bleak in multiple parts of the world. Inflation in the United States, energy warfare between Europe and Russia, and China’s COVID-induced economic straitjacketing all have the potential to roll the globe into recession.
Despite dark waters ahead, Kemp observes that oil hedge funds are resisting shorts against oil. In fact, “overall, bullish long positions outnumber bearish short ones by a ratio of almost 5:1.”
Currently, low global petroleum reserves and restrained output by OPEC and U.S. shale producers support bullish sentiment. Likewise, Russian oil production and export are threatened by sanctions, amplifying the bullishness.
Kemp argues that oil hedge funds may be adjusting to the geopolitical turmoil of the last few months and that the “initial shock” of Russia’s invasion and the subsequent sanctions may be wearing off.
Even still, the war in Ukraine continues to surprise. On May 11, Ukrainian pipelines moving natural gas from Russia to Europe shut down in Kyiv, decreasing flow volume to Europe by a quarter.
In addition to constraining the European gas supply, this marked the first disruption in exports via Ukraine since the conflict began.