Why hedge funds are pouring into energy right now

Energy markets started the week on the back foot after US Secretary of State Antony Blinken announced that Israeli Prime Minister Benjamin Netanyahu had accepted a ceasefire proposal to end the war in Gaza. Blinken made the revelation on Monday after meeting with top Israeli officials in Jerusalem, and markets have recently reacted wildly to any news coming out of the Middle East, with oil prices falling whenever ceasefire talks are underway. only to reverse. when it fails.

Oil futures contracts fell by their biggest margin in two weeks after reports suggested a ceasefire and hostage release deal in Gaza could be closer. Previously, Iran had suggested a benevolence to delay at least one retaliatory attack on Israel after the July 31 killing in Tehran of Hamas leader Ismail Haniyeh, if Israel and Hamas agreed to a permanent cease-fire. Brent crude for October delivery was trading at $77.11 a barrel at 12:45 a.m. ET in the intraday session on Tuesday, down from $81.20 a barrel a week ago, while WTI crude oil for September delivery traded at $73.94 a barrel, compared to $78.85/barrel a week ago.

Iran helped further lower oil prices on Tuesday when a spokesman for the Revolutionary Guards said an attack on Israel could be delayed for some time, noting that time was in “Tehran’s favor.”

Signs of weak demand in China’s core market aren’t helping matters either. The prospect of weak demand in China is offsetting any gains from supply risks, with government data showing demand for crude in the country fell 8% y/y in July.

Related: China’s coal output rises to meet energy demand

However, oil markets may be able to regain some momentum if the latest wave of buying by money managers continues. According to a Goldman Sachs note via Reuters, hedge funds sold industrial stocks at the fastest pace since December, while we buy energy stocks for the fourth consecutive week last week. Energy is now at its highest proportion in hedge fund portfolios since the start of the year. Traders, meanwhile, bet against passenger airlines as well as companies that provide professional services, ground transportation and machinery. The latest pivot in energy stocks comes amid expectations of an interest rate cut in September.

“Global growth will be better than expected if the Fed can pull off a soft landing, and that’s probably why these traders are making the switch.h,” Paul O’Neill, chief investment officer at wealth management firm Bentley Reid, told Reuters.

Trump Trade

It seems the so-called “Trump Trade” is still alive and well, despite US Vice President Kamala Harris rising in the polls since then. she replaced President Joe Biden as the Democratic nominee a month ago. Many institutional investors still give Trump the inside track and examine how a second Trump administration could impact everything from inflation and monetary policy to consumer spending. Investors are also betting that Trump’s return to the White House would mean less regulation, a potential tailwind for heavily regulated sectors such as energy and banking.

Conversely, Trump’s recent comments about raising tariffs on China and making Taiwan pay for US military protection have sparked a sell-off in semiconductor, AI and Big Tech stocks, even heavyweights like Nvidia Corp. (NASDAQ:NVDA) is down.

However, Art Hogan, chief market strategist at B Riley Wealth, issued a cautionary note, “Things that are said and proposed on the campaign trail are often difficult to implement once you get to 1600 Pennsylvania Avenuehe said.

Related: Surprise build in crude stocks adds pressure on oil bulls

To be fair, the oil and gas sector will probably do just as well under a Harris presidency, especially as she continues to push Biden’s policies. After all, by most key metrics, the U.S. oil and gas industry has flourished under the Biden administration despite its push toward a carbon-free future, proving that even Washington doesn’t have enough power to single-handedly influence large, interconnected markets at global level, like oil. and gas. Republicans have repeatedly criticized Biden’s climate policies, accusing them of compromising US “energy independence” by limiting US oil and gas production and raising fuel prices. Meanwhile, Trump has vowed to “drill baby, drill” and restore America’s energy independence.

However, Trump won’t have the job: U.S. crude oil and natural gas production have both hit all-time highs under the Biden administration. According to the US Energy Information Administration (EIA), crude oil production in the United States, including condensate, averaged 12.9 million barrels per day (b/d) in 2023, breaking the previous US and global record of 12.3 million b/d set in 2019. Average production monthly crude oil output set a new monthly record high in December 2023 at over 13.3 million b/d. Ironically, the current administration has issued a total of 10,070 onshore drilling permits in its first three years in office, compared to 9,892 under Trump over a similar period.

Fossil fuel investors have hardly complained under Biden: Energy stocks are up 124% year to date since Biden took over in the Oval Office, compared to a -65% decline for the comparable period under Trump.

By Alex Kimani for Oilprice.com

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