Hedge Funds Are Running Back To Oil

June 14, 2021 01:45 PM
Hedge funds have boosted their net long position to the highest level in nearly 3 years
Big energy companies retreating from production isn’t going to diminish demand
The situation for natural gas looks more bullish by the day
Energy Report

Energy Report

The Phil Flynn Energy Report 

The Hedge Funds are Back

All of the sudden the hedge funds love oil again. These are the same hedge funds that, in recent weeks, abandoned the oil complex as they worried that the resumption of Iranian nuclear talks would bring a flood of oil to the marketplace. Yet, based on signs that demand in the United States and the world was coming back, the hedge funds boosted their net long position to the highest level in nearly 3 years last week. That helped support the oil market late last week, along with reports that the Biden administration was considering giving into pressure from refiners to reduce ethanol in gasoline. 

Reuters reported that the U.S. EPA was considering ways to provide relief to U.S. cell refiners from biofuel blending mandates, as the price of both corn and soybeans has exploded. Talk of the waivers caused the grain market to sell off and the oil market to rally. That turn around by the Biden administration seems to be unaligned with his green energy cuts. At the same time, he’s a politician; sometimes politics get put ahead of the planet.

The other major factor that was keeping hedge funds out of the market was the possibility of an Iranian nuclear deal. The Biden administration has been falling all over itself trying to get Iran back to the table for these talks, essentially begging them to get back into the ill-fated 2015 agreement. 

There have been mixed reports of progress coming out of the talks. Oil prices sold off sharply after a report that sanctions on Iranian oil were lifted. It was later clarified that they were lifting sanctions on some Iranian oil entities and individuals. 

Over the weekend, Bloomberg News reported that Iran's lead envoy said that a deal was unlikely before the presidential election in his country. President Hassan Rouhani, who negotiated the original deal in 2015, is due to leave office in August after serving 2 terms. According to Bloomberg News, he’s widely expected to be replaced by Ebrahim Raisi, a cleric generally seen as hostile when engaging with the U.S. Most oil traders realize that if Raisi is in power, the likelihood of an Iranian nuclear deal being made is small.

The Bloomberg report also said that the Iran council has reached a broad agreement with the U.S. over the sanctions on its industrial sectors, including energy, but warned that there was very little time left for real powers to revive a 2015 nuclear deal. Based on market action in hedge fund activity, it appears that the market is putting the Iran deal in the rearview window and is now focused on the tightening of the global oil supply.

Now there’s a breaking report of a leak at a Chinese nuclear facility. CNN reports the following:

The U.S. government has spent the past week assessing a report of a leak at a Chinese nuclear power plant, after a French company that part owns and helps operate it warned of an "imminent radiological threat," according to US officials and documents reviewed by CNN.

The warning included an accusation that the Chinese safety authority was raising the acceptable limits for radiation detection outside the Taishan Nuclear Power Plant in Guangdong province in order to avoid having to shut it down, according to a letter from the French company to the US Department of Energy obtained by CNN.

While the world's oil demand goes up, the big oil companies continue to retreat away from oil production. Royal Dutch Shell, which has recently been put under big pressure by its shareholders to become greener, is now reportedly looking into selling its massive U.S. Permian Basin holdings. It’s reported that Shell assets in the Permian basin could be worth as much as $10 billion. Along with other big energy companies, Shell’s retreat from fossil fuel production will likely substantially raise fossil fuel prices in the future.

Shell’s been under pressure since a court ordered the company to reduce its greenhouse gas emissions by 2030, much sooner than it had originally planned. Shell is looking to appeal that ruling, but in the short term it's taking action to sell off its properties and reduce its oil production capabilities. 

OPEC and Russia, of course, see types of moves with the hope that they're going to further their dominance over the global oil supply, as well as the global economy. For generations people have realized that the ability to produce energy produces power; not only the power that we use to turn on lights or drive our cars, but also political power. Make no mistake about it that OPEC and Russia will use their energy prowess to push their political agenda: they've done it in the past and they will do it again.

Oil prices are holding up well, even as gold gets beat up ahead of the Federal Reserve meeting and as the grain market tumbles thanks to a possible relaxing of biofuel requirements. It appears the trade is waking up to the fact that big energy companies retreating from production isn’t going to diminish demand, leading us to a tighter and tighter global supply-to-demand ratio.

Last week's gasoline demand seemed to disappoint, but the implied demand numbers from the Energy Information Administration were likely skewed due to the Colonial Pipeline mishap. If gasoline demand is indeed weak, you’d never know it when pulling up at the gas pump. 

AAA puts the national average of gasoline at $3.08 per gallon. It seems that we're not getting our normal post-Memorial Day dip in prices— that could be because the gasoline demand situation is only getting stronger. The national average for premium is at $3.69 per gallon and diesel fuel is at $3.21 per gallon.

The heat has been driving natural gas prices sharply higher, as well as reports of TETCO having one of its pipelines declared a force majeure. If the heat is on, we're going to see sharply higher natural gas prices later in the summer. Make sure you're prepared with some options: the situation for natural gas looks more bullish by the day.

Don’t miss out on my wildly popular trade levels on all major markets, as well as special subscriber-only updates. Call me at 888-264-5665 or email me at pflynn@pricegroup.com.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.