Hedge funds eye oil bets as Middle East tensions rise

New York

ESCALATING tensions in the Persian Gulf are beginning to justify renewed optimism that oil will rebound.

Money managers boosted their bets on rising crude prices by the most in four months as at July 16, according to data released Friday. That left them exposed to a 7.6 per cent weekly price drop as, for four days, the market focused on a worsening outlook for demand and seemed indifferent to geopolitics.

But prices soared almost 2 per cent on Friday with the US saying it shot down an Iranian drone and Iran capturing two British-flagged tankers. Ian Bremmer, president and founder of Eurasia Group, a political risk research and consulting firm, is among experts saying futures could shoot up past US$100 a barrel if a war breaks out.

"We see continued scope for elevated tensions after Iran seized multiple tankers in the Strait of Hormuz," TD Securities commodity strategists led by Bart Melek said in a note to clients. "The situation in the Middle East is not as calm as crude markets may suggest and should serve to keep investors positioned long moving forward." Brent crude, the global benchmark, climbed as much as 2.3 per cent after Iran grabbed the two vessels.

Net-length for WTI - the difference between bets on a price increase and those on a decline - jumped 26 per cent to 199,644 futures and options, according to the US Commodity Futures Trading Commission. Long positions grew by 20 per cent to the highest since late-May. Short-selling wagers edged up 1.1 per cent.

Given the lag in releasing the data, it's unclear how much hedge funds benefited from Friday's rally. The added bullishness also stemmed from a hurricane that temporarily curtailed production in the Gulf of Mexico, and investors likely unwound some of their bets as the storm faded, Mr Melek said. BLOOMBERG