Investors buy oil on fears of inflation, pushing prices even higher

Mr. Philip is the head of investment at SYZ Private Banking in Switzerland, and his biggest concern is inflation falling out of the $28.5 billion of client investments he manages. That’s why he is buying oil.

Fund managers like Mr. Philip are contributing to the rally that has pushed oil prices to their highest level since the 2014 energy bust. While the energy-futures market is more generally the province of producers and commodities-focused hedge funds, an oil rally that shows no signs of slowing is now putting a strain on traditional money managers who stock and bond portfolios. run.

Because commodity prices tend to rise with inflation, they can protect investment portfolios from its erosive effects. When combined with other commodities such as copper and gold, energy is a “fairly good hedge”, said Mr. Philippe, who has been buying energy futures and selling longer-term bonds that will lose value if inflation is higher. Time gets longer than expected.

To be sure, inflation fears aren’t the main driver of the West Texas benchmark’s run from $62 a barrel in August to $85 this week. The Organization of the Petroleum Exporting Countries sticks to its plan to increase production in small increments. Natural gas shortages have prompted some industrial manufacturers to switch to diesel, which is refined from oil.

These inputs are difficult to sort out. But traders and analysts say some of the recent oil gains can be explained by inflationary concerns, especially on days where there is no news on supply that drives trade by ordinary players such as commodity brokers and oil producers. can.

In a sign of investor interest, money is pouring into funds that buy energy futures and stocks, just as fears of inflation took center stage this fall. According to data provider EPFR, these funds have experienced four straight weeks of inflows for the first time since spring, with last week’s $753 million, the highest weekly total in five months.

Data from the Commodity Futures Trading Commission showed an increase in speculative buying of crude-oil futures and options on October 19. Bets on $100 a barrel of oil — a price last seen seven years ago — rose earlier this summer. This month, investors have bet on $200.

These investors, especially those who are newcomers or buying for ancillary reasons such as inflation fears, are taking the risk that a sudden shock could bring down oil prices. This happened in the spring of 2020, when demand fell due to the Covid-19 pandemic, as Saudi Arabia ramped up production.

What’s more, energy is a major contributor to the consumer-price index, the most comprehensive measure of inflation. This means that investing in energy as a hedge against rising prices can be a self-reinforcing cycle: as oil prices rise, so does inflation, which leads money managers like Mr. Sends energy back to market for security.

“People buy oil, which raises inflation expectations, and that can feed itself,” said Evan Brown, head of asset allocation at UBS Asset Management.

Inflation has gone from being an expected and natural outcome of economies emerging from lockdown to a major source of investor anger. Higher prices affect yields on fixed-rate bonds and loans. Stocks of companies that may not easily incur high costs on customers also take a hit.

US consumer prices rose 5.4% year-on-year in September, faster than in August and just below a 30-year high. Germany’s 4.5% annual rate in October was the biggest year-on-year increase since 1993.

Central bankers in the US and Europe say higher prices are likely to be temporary and supply-chain delays will be resolved and economies will restart. But investors are not so convinced. In addition to more traditional inflation hedges, such as bonds whose yields are tied to consumer prices, they are coming in for commodities.

Mr. Brown, who helps prepare the portfolio for approximately $1.2 trillion of client assets at UBS, is recommending commodity futures, energy stocks and currencies to oil-rich countries such as Russia and Canada. John Roe, head of multiset funds at Legal and General Investment Management, said he is protecting his investments with the Chilean peso, which is tied to copper prices, and shares in gold miners.

So far the strategy seems to be working. Inflation is rising but the prices of energy and many metals are also rising. Paul O’Connor, head of multiset at Janus Henderson, warned that might not last.

Today’s inflation is being driven by supply chains, which have created shortages of almost everything, driving up raw material prices. But he expects inflation to be driven more by rising wages in the future, and it is less clear whether it will have a similar effect on commodity prices. “Quite dubious,” he said of the strategy.

This story has been published without modification to the text from a wire agency feed