Hedge funds pile on bullish oil bets as Middle East tension heats up

[NEW YORK] The Middle East is kicking things up a notch in the oil market.

Hedge fund bets on rising Brent crude prices hit a fresh record as tension in the oil-rich region reached a whole new level, sending prices to their highest in more than two years.

Disruptions in exporting countries such as 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 almost 14 million barrels a day of crude, or more than 40 per cent of production from the Organization of Petroleum Exporting Countries (Opec), but they are also rival regional powers behind major Middle Eastern conflicts.

In a move that shocked the world, Saudi Arabian ministers and billionaires were 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, 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, 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 are ready to bomb Lebanon back to the Stone Age to counter Hezbollah's military buildup.

"Even though at the moment there is no risk to physical supply, because the region is so dense in oil production, any enhanced uncertainty there is just going to increase desire to bid up the price of oil," Tamar Essner, an energy analyst at Nasdaq in New York, said by telephone.

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 US$2.19 higher than the December 2019 contracts.

Hedge funds raised their Brent net-long position - the difference between bets on a price increase and wagers on a drop - by 2.4 per cent to a record 543,069 contracts in the week ended Nov 7, according to data from ICE Futures Europe.

Longs surged by two per cent to an all-time high, while shorts tumbled two per cent to the lowest in more than eight months.

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."

While Opec's Secretay-General Mohammad Barkindo said he sees no opposition to the group prolonging production cuts, Citigroup warned bulls they may be disappointed.

Should any potential outcome from a Nov 30 meeting not satisfy investors, that could lead to a reversal in positioning, Ms Essner said.

"Disappointment could be defined as Opec did exactly what they telegraphed they were going to do, but nothing more."

BLOOMBERG