Although the US WTI crude oil futures rebounded more than 1% on June 3, these gains were still lacking in strength in the face of a sharp drop of more than 18% in the past 10 trading days.
Before the opening of the U.S. stock market on June 3, the yield of 10-year U.S. Treasury bonds hit a low of 2.08% since September 2017, and the three major U.S. stock index futures fell between 0.3% and 0.49%. This shows that most investment institutions will still be constrained by global trade tensions and will sell high-risk assets such as crude oil futures and U.S. stocks at any cost to avoid risk. Gordon Johnson, an analyst at Axiom, an American hedge fund, told reporters.
In his view, as of 20:00 on June 3, WTI crude oil futures rose to around $54.60 a barrel from its lowest level since January 10, but this was more like the self-rescue of some funds to avoid the risk of bursting their crude oil portfolio.
Neil Dwane, global strategist at Allianz Group, also told reporters that the current mood of crude oil futures market trading is quite depressed - the funds that bought up crude oil futures due to the escalation of Irans geopolitical risk events suffered heavy losses due to the sharp drop in oil prices, and some of them were forced to burst their positions and leave the market; the funds that still hold long positions in crude oil futures have also become shocked birds, accelerating their selling. Crude oil futures multi-position stop loss off-site self-insurance.
In fact, the whole crude oil market is currently facing three major shocks. Apart from the global trade tension which led to the frantic selling of crude oil futures by institutions to avoid risk, the implementation rate of OPEC cut production in May dropped sharply from 132% in April to 96% (because Saudi Arabia, Angola and Iraq increased crude oil production to fill the supply gap in Iran), and the decline of U.S. EIA crude oil stocks is far below market expectations. The centre of gravity of the equilibrium price of crude oil continued to decline. Neil Dwane said, but what most investors resent most is that in September last year, a large number of investment institutions suffered huge losses in speculative oil prices because of Irans restraint, and now they are again in the process.
Indiscriminate selling of risky assets
As trade frictions between China and the United States continued to heat up in late May, leading to a sharp fall in U.S. stocks, these hedge funds realized they were wrong. He speaks frankly. As a result, more and more hedge funds began to sell high-risk assets indiscriminately, even though crude oil futures are facing the halo of Irans geopolitical risk escalation and supply shortage.
The obvious sign is that in the week of May 21, WTI crude oil futures hedging positions held by swap traders dominated by investment banks and other institutions dominated by speculative capital fell by 68.058 million barrels and 11.3281 million barrels, respectively, compared with the previous week, accounting for 20.7% and 23.9% of their total WTI crude oil futures hedging positions, respectively.
It seems very unusual. The hedge fund manager told reporters frankly that because arbitrage itself does not bet on the price of crude oil futures rising or falling, but achieves the traders expected revenue target through hedging operations, these hedging positions suffered such a large proportion of selling, which only shows that these institutions are reducing the proportion of crude oil investment hedging at no cost, even if these crude oil futures positions have been done. Risk hedging.
In his view, this also triggered a new trading strategy, that is, more and more institutions began to judge whether the market hedging investment sentiment continued to rise based on the decline in the yield of U.S. Treasury bonds, and then decide whether to increase the strength of selling crude oil futures hedging.
Neil Dwane pointed out that this trading strategy peaked after the United States imposed tariffs on Mexicos imports on Friday. As market fears about hedge investments continue to rise due to growing global trade tensions, the yield on 10-year U.S. Treasury bonds fell from 2.437% on May 21 to 2.08%, forcing a large number of hedge funds to quickly liquidate all high-risk assets such as crude oil futures.
According to the latest CFTC data, the net long position of WTI crude oil futures held by hedge fund-based asset management institutions dropped by 3.62 million barrels from the previous week, accounting for 17.9% of the total net long position of the fund.
More importantly, trading sentiment in the whole crude oil futures market is changing dramatically. When more and more funds find that their strategy of buying up oil profits while Irans geopolitical risk escalates has suffered another tragic failure (as in September-October last year), all they can do is to clear all crude oil futures positions as soon as possible and protect themselves. He speaks frankly.
Hard times for hedge funds
Reporters learned that WTI crude oil futures fell sharply, but also broke the hedge fund use in June OPEC extended cut-off agreement to buy oil prices.
Although Falihs announcement will drive some quantitative investment funds to buy and raise oil price arbitrage on the low side, which will bring WTI crude oil futures back to around $54.40 per barrel, most investment institutions believe that the more practical significance of buying and raising oil prices on the low side is to avoid the risk of bursting the portfolio of quantitative funds own crude oil, so as to achieve self-rescue. Gordon Johnson said.
In the view of the U.S. commodity hedge fund managers mentioned above, the hedge fund community has realized that the negative impact of the current global trade tension on the decline in crude oil demand and prices has far outweighed the positive effects of the escalation of Irans geopolitical events and the extension of OPECs output reduction agreement.
What we can do now is to sell all the risky assets and prepare for the worst in global trade. He pointed out.
Source: Yang Qian_NF4425, Responsible Editor of Economic Report in the 21st Century