Faced with the U.S. dollar hitting new highs and the increasing risk of a global economic recession, crude oil bulls are “retreating.”
As of 17:30 on September 27, the main contracts of WTI crude oil futures and Brent crude oil futures were hovering at US$77.59/barrel and US$83.9/barrel respectively. Both hit their lowest values this year at US$76.25/barrel and US$82.44/barrel. bucket.
“This makes crude oil bulls extremely frustrated.” A crude oil futures broker revealed to reporters that many hedge funds and asset management institutions originally bet on the continued restriction of Russian crude oil exports in the fourth quarter and the increase in demand for heating oil in winter, and they have been buying crude oil futures at the bottom. But in the face of the current plummeting oil prices, they can only choose to stop their losses and leave the market.
In the view of the crude oil futures broker, compared with the increasing risk of global economic recession, the biggest headache for crude oil bulls is the US dollar index, which has hit new highs.
Bob Yawger, head of energy futures at Mizuho Bank, said bluntly that it is difficult for anyone to expect oil prices to rebound when the U.S. dollar is so expensive. What’s more, the central banks of many oil-consuming countries continue to raise interest rates, further raising market concerns about an economic slowdown, which may squeeze oil demand.
The reporter learned that the arbitrage trade of “buying up the US dollar and shorting everything” is currently popular in the financial market. That is, investment institutions are constantly increasing their bullish positions on the US dollar while short-selling all commodities priced in US dollars, including crude oil, copper, aluminum, gold, etc. .
This invisibly led to a sudden change in the long-short pattern of the crude oil futures trading market. At present, a large number of traditional long-term crude oil futures funds such as CTA and macroeconomic strategies have stopped their losses and left the market, allowing quantitative investment funds (short-selling crude oil arbitrage around the rise of the US dollar index) to quickly dominate the crude oil futures price trend.
It is worth noting that as WTI crude oil futures fell below US$80/barrel, some asset management institutions once again entered the market to bargain for crude oil futures.
The latest data released by the U.S. Commodity Futures Trading Commission (CFTC) shows that in the week ending September 13, the net long positions in crude oil futures options held by hedge funds and other asset management institutions surged by 10.392 million barrels compared with the previous week.
Behind this, these hedge funds are betting that OPEC will slightly reduce production in October to support oil prices. On the other hand, they are betting that the restriction on the price of crude oil exports from Western countries to Russia will lead to a further expansion of the global crude oil supply gap in winter, which will eventually trigger the stabilization and recovery of crude oil futures.
However, whether the plan to buy bottom funds will be effective depends on the “face” of the US dollar.
“If the Federal Reserve continues to significantly raise interest rates and the U.S. dollar index continues to reach new highs, it is difficult to imagine that crude oil futures prices will rebound significantly.” The aforementioned crude oil futures broker pointed out.
Quantitative investment funds “dominated” the decline in crude oil futures
This week, the American research organization Ned Davis Research released a latest report showing that the probability of a global economic recession is as high as 98%, triggering a “severe” recession signal.
The research institution pointed out that the risk of a severe global economic recession in part of 2023 is rising, which will bring more downside risks to risk assets such as global stock markets.
A Wall Street commodity investment hedge fund manager told reporters that although many hedge funds admit that the current price of crude oil futures is lower than reasonable valuation, as the risk of global economic recession increases, “sell everything and cash is king” will still It is a very sound investment strategy.
The latest report released by Bank of America pointed out that as the prices of stock markets, commodities and bond markets continue to fall, investors are avoiding all asset classes, and market pessimism has reached its highest level since the subprime mortgage crisis in 2008.
The reporter learned that compared with the increasing risk of global economic recession, the current greater selling pressure on crude oil futures comes from the US dollar, which has hit new highs.
Since both WTI crude oil futures and Brent crude oil futures are priced in U.S. dollars, the U.S. dollar index hitting record highs is causing crude oil futures valuations to continue to fall. Especially after the U.S. dollar index hit its highest value of 114.65 in the past 20 years this week, WTI crude oil futures and Brent crude oil futures fell below the integer mark of US$80/barrel and US$90/barrel respectively, giving up all gains this year.
Behind this, quantitative investment funds have dominated the price fluctuations of crude oil futures – as crude oil futures prices have continued to fall since June, more and more CTA and macroeconomic crude oil long funds have stopped their losses and left the market due to investment losses. At present, crude oil The futures market mainly plays the leading role in quantitative investment funds. Quantitative investment funds ignore the fundamental changes in crude oil supply and demand, focus on the rise in the US dollar index, and short-sell crude oil futures for arbitrage, causing crude oil futures prices to continue to fall.
Datayes shows that Brent crude oil futures have fallen by more than 40% since June, driven by factors such as the U.S. dollar index hitting new highs.
Stephanie Lang, chief investment officer of Homrich Berg, an asset management institution, said that it is difficult to imagine that crude oil futures prices can stabilize and rebound with such a strong U.S. dollar, not to mention that the Federal Reserve’s continued substantial interest rate hikes are still pushing up the U.S. dollar index.
In her view, as the US dollar hits new highs, quantitative investment funds continue to push down crude oil futures price arbitrage, and the crude oil futures market is continuing to stage a wave of bulls stopping losses and leaving, causing crude oil futures prices to fall endlessly.
Reporters have learned from many sources that due to the sharp decline in crude oil prices since June, CTA and macroeconomic strategy funds have invested heavily in crude oil long investment portfolios.Faced with a loss of at least 20% of their net value, they were forced to close their long crude oil futures positions and leave the market to reduce losses. This has continued to strengthen the pricing power of quantitative investment funds in the crude oil futures trading market. As a result, the negative correlation between crude oil futures and the U.S. dollar index continues to increase, further presenting the situation of “the stronger the U.S. dollar, the weaker the oil price.”
“What are the chances of winning” for bargain-hunting funds?
However, financial markets never lack those who take the chestnuts out of the fire.
Facing the falling crude oil futures, some hedge funds and asset management institutions are quietly joining the bargain-hunting camp.
The latest data from the CFTC shows that although the U.S. dollar index has hit new highs since September, hedge funds and other asset management institutions still bucked the trend and increased their net long positions in crude oil futures options by 10.392 million barrels in the week of September 13.
The reporter learned that these bargain-hunting funds mainly come from multi-strategy funds and event-driven hedge funds. They mainly bet that OPEC will slightly reduce production and Russian crude oil exports will continue to be restricted in the fourth quarter. Coupled with the strong demand for heating oil in winter, crude oil futures will eventually “ignore” The dollar is strong and prices are recovering.
A multi-strategy hedge fund manager involved in bargain hunting for Brent crude oil futures told reporters that they currently have a reasonable pricing of Brent crude oil futures at 100-105 US dollars per barrel, because this is also the crude oil futures price OPEC wants to see.
It is worth noting that although many large global investment banks have recently lowered the valuation of crude oil futures, their forecasts are still higher than the current oil price.
Morgan Stanley analyst Martijn Rats said that due to the slowdown in global economic growth leading to a decline in crude oil demand, he predicts that the average price of Brent crude oil futures in the fourth quarter will hit $95 per barrel.
Analysts at JP Morgan predict that Brent crude oil futures prices will reach $101/barrel in the fourth quarter, an increase of about 17% from the current price. This is because the European Union plans to basically stop buying Russian crude oil in December, causing global oil prices to remain unchanged in winter. May rise.
“But this does not mean that the crude oil futures market will set off a fierce game of long and short funds.” The aforementioned crude oil futures broker pointed out. If the U.S. dollar index continues to hit new highs and the risk of global economic recession is higher than expected, these bargain-hunting funds will still quickly stop their losses and leave. Because they also know that if more quantitative investment capital joins the short-selling crude oil futures camp due to the soaring US dollar, they will end up with the mantis trying to control the cart.
He emphasized that as long as the Federal Reserve does not stop its aggressive interest rate hikes, the trend of the U.S. dollar will still “lead” the valuation changes of almost all commodity futures. Even if crude oil futures are undervalued, it will be difficult to stage an independent price rebound in the face of the dollar that hits new highs.