Investors bet there is still $100 in oil. There is scope to walk after touching

by Amrit Ramkumar | UPDATED February 27, 2022 05:30 AM EST

Price advances put pressure on global economy battling rising inflation

On Wall Street, a bet is that $100 of oil is just the beginning.

Crude oil prices rose sharply for the first time in nearly eight years, reaching $100 a barrel last week after Russian airstrikes in Ukraine and threats to disrupt the movement of oil and other materials to and from the region.

The advance builds on a historic rebound for commodities since the start of the Covid-19 pandemic two years ago – but also puts pressure on a global economy battling rising inflation.

While the supply shock is expected to propel gasoline prices at the pump, traders are not betting on a slowdown in demand and say they are in a bull market condition for commodities to move forward.

Brent crude, the global gauge of oil prices, ended the week at $97.93 a barrel, marking its climb of nearly 50% from the previous year. US crude closed at $91.59. Both gauges held above $100 on Thursday for the first time since 2014 before pulling back.

“The pace of the moves really scares me the most,” said Rebecca Babin, senior energy trader at CIBC Private Wealth, US, adding that she expects oil to rise if more punitive measures are imposed on Russian energy companies and banks.

Data from FactSet shows that investors put nearly $3.5 billion in broad commodity funds such as the Invesco DB Commodity Index Tracking Fund this year, the largest number of starts in a year since the fund grew over the past decade. There is a great flow. The fund has taken in more than $10 billion in the past 12 months.

Traders are also buying shares of energy producers to bet on higher prices and bullish on oil futures and options. Futures oblige the holder to buy an asset at a specific price at a future date, whereas options give the owner the right but not the obligation to do so.

Net bullish bets on oil by hedge funds and other speculative investors have risen recently, according to the Commodity Futures Trading Commission. The ratio of bullish bets to bearish bets recently reached 15 to 1, the highest point since last summer.

Some bullish traders were betting on very high prices before the Russian invasion, pointing to the world’s dwindling ability to increase production. Capacity has declined in recent years, with companies coming under pressure to limit spending and carbon emissions. Withdrawal from the industry by big financiers has put further pressure on the producers.

The Bulls claim that those trends and the declining inventory have set up conditions for a highwire price move that could be exacerbated by prolonged military conflict.

“It’s set up to drive prices crazy,” said Josh Young, chief investment officer at Houston-based Bison Interests. He is betting on higher oil prices by buying shares of producers such as Journey Energy Inc. in the US and Canada.

Shares of energy companies have recently made the stock market’s best performance after years of lag. The S&P 500 energy sector is up 23% so far this year. The broad index is down 8%.

Some investors, such as Mr. Young, say oil could close to its 2008 record $150 due to global supply constraints. Consulting firm Rystad Energy said oil could trade around $130 if the situation in Ukraine worsens, while analysts at JPMorgan Chase & Co said crude could reach $120.

According to data provider QuickStrike, some of the most popular options for US crude have recently been tied to prices of $101, or $140 a barrel. Ahead of Thursday’s rally, traders had piled into options bets that touched $100 involving oil for months.

In another bullish sign, futures involving oil that will soon be delivered are now more expensive than prices associated with contracts that expire several months from now, a condition known as backwardation. Is. This indicates that traders expect the markets to be short supply and encourage investment in commodities because traders who sell near-term contracts before they expire and buy cheaper contracts involving future months can take profits. Huh.

Many traders turn to the oil market when they expect high inflation or a geopolitical crisis to pinch the economy, sometimes leading crude oil and stocks to trade in opposite directions. Oil trimmed its gains and stocks soared as traders bet on punitive sanctions and energy-supply disruptions at the end of the week.

The Biden administration has said it is considering releasing domestic strategic oil reserves to ease pressure on consumers at the pump. America’s withdrawal from the Iran nuclear deal and lifting sanctions on Iran are other steps that will bring some oil back to the global market.

Investors are closely monitoring the commodities as they represent a large swath of Russia’s global economic footprint. The country accounts for more than 10% of the world’s production of oil, natural gas and wheat. It is also a major producer of potash – a major input into the fertilizers growing the world’s crops – as well as palladium and platinum, two metals that are important for the catalytic converters that filter emissions in cars.

If a serious shortfall emerges, experienced traders warn that the price reaction will be quick. Robert Yeager, executive director of energy futures at Mizuho Securities USA, said oil could hit $125 if the conflict worsens.

“It can be very scary and very expensive,” he said.