Investors Flock Back Into Oil for Reflation Trade, Hedging

(Bloomberg) - Investors and oil companies are pushing back into the crude oil market.
Total holdings of Brent and WTI futures have risen to their highest level since May. Banks from Goldman Sachs Group Inc. to JPMorgan Chase & Co. are seeing the market outlook improving and some large hedge funds are talking about commodities entering a super cycle of pricing.
The rise in open positions marks a turnaround in the aftermath of the sub-zero oil crash, a course that, along with the decline in consumption, triggered a collapse in global crude oil production. Trade slumped last year as U.S. crude oil production plummeted and consumers like airlines withdrew from the hedging business. The nadir was November. Things have picked up since then, with a strong upturn this year.
"People are rethinking the commodity asset class investment case," said Harry Tchilinguirian, oil strategist at BNP Paribas. "The open interest in oil is rising again as macro-oriented funds examine the case for commodities."
JPMorgan is one of those banks that favor commodities as a hedge against inflationary pressures, while Bank of America Corp. believes that reflationary pressures are already helping to raise oil prices.
The rally has also seen a surge in producer hedging, with WTI nearing $ 50 a barrel for 2022. Brent for the same period is already above this mark. According to Fatih Birol, Executive Director of the International Energy Agency, a large part of shale oil production is profitable at current levels.
Along with the recovery in activity, the number of bullish market participants has also recovered. Last week there were 163 money managers long Brent and WTI, most of them since February. That is a low of 94 in March.
The relocation is good news for CME Group Inc. and Intercontinental Exchange Inc., which own the world's largest oil exchanges.
"Our WTI markets continue to reflect broad participation around the world as customers control their global price risk," said Peter Keavey, general manager, energy products, CME Group. "WTI remains the market choice for managing crude oil exposure."
Crude oil has had more reasons to get a boost so far this year. With a huge index rebound, around $ 9 billion was expected to pour into the market last week as prices soared to a 10-month high. In addition, the weakness of the dollar is spurring renewed talk of a commodity super cycle. Both JPMorgan and Goldman Sachs have recommended increasing exposure to this sector over the past few days.
"There are, of course, a lot of producer hedges out there, and some of them will go public in some form," said Paul Horsnell, director of commodities research at Standard Chartered Plc.
Additionally, swap dealers' short positions - a sign that banks are managing the hedges they sold to producers - rose to their highest level since April last week.
And with forecasts of a global economic recovery this year, more inflows for oil may come. The value of Brent and WTI's open positions is still down about a third from peaking at $ 408 billion in 2018. However, the World Bank expects the global economy to grow by 4% this year and a 7.9% increase in China, the world's largest oil importer.
"Brent is the global benchmark for crude oil prices. As forecasts for global economic activity improve, we see strong demand for trading and risk management through the Brent futures market," said Jeff Barbuto, global director of oil markets for ICE.
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