The three major positive signs of the oil market are showing signs of "landing"! Hedge funds are beginning to return to the oil market

After being hit by the crude oil slump in the first half of 2023,Hedge funds are flooding back into the oil market at their most bullish pace in more than a year.

At the start of the year, fund managers bet that Russian production cuts and a recovery in Asian demand would push crude back to its 2022 highs. But those hopes were quickly dashed by recession fears, turmoil in the US banking sector and strong inflows of Russian money. Hardest hit was Pierre Andurand, the oil trader known as the "god of crude trading," whose main fund had the worst performance in the first half of the year.

But with the OPEC + cuts and the extension of unilateral cuts by Saudi Arabia and Russia, crude prices have surged 30 per cent since mid-June and hedge funds have upped their net long bets.Fund managers are now the most bullish on U.S. crude oil since June 2022, as many of the expectations they expected to trigger higher oil prices are finally showing signs of coming true. Michael Tran, global energy strategist at RBC Capital Markets, said in an email:

"Quite a bit of'dry powder 'has been sitting on the sidelines, which means the recent strength could spark further chase."

Anduran's fund had one of its best months ever in July, and other hedge funds have returned to the market, helping to boost crude market participation.

However,Caution remainsConcerns about Asian demand and U.S. monetary policy have hampered the rise in crude prices. Major banks, including Goldman Sachs, which had forecast oil prices would surge to $100 or higher late last year, are now maintaining more dovish forecasts, although they note that OPEC +'s recent moves offer the possibility that prices will exceed their forecastsThe lingering memory of first-half losses could soften bullish sentiment among some fundsread。

In addition,Profit-taking is also a major concern for investorsOn Tuesday, WisdomTree's Brent fund pulled nearly $500 million after Brent rose above the $90 mark, the largest one-day outflow on record.

Three expectations are showing "signs of realization"

For now,Signs of market tightening are beginning to emergeThere was no sign of this in the first half of the year. Saudi Arabia and Russia extended their supply curbs of 1 million and 300,000 barrels a day, respectively, until December. The news contrasts sharply with the supply situation the market was accustomed to earlier this year, when Russia's oil supply rose by more than 1.40 million barrels a day from the end of last year.

On the supply side, it is reported that Iran's oil sales are up to dateIndustrial foreign exchangeAccording to investors, Iran's oil exports have been on the rise in secret diplomacy with the United States, but may now have reached their peak this year.

Secondly,Asian demand, which the market largely abandoned in July, is expected to rebound in the first half of 2023It is improving.While not as strong as expected, a series of recent industry forecasts suggest that global oil demand will rise to record levels.

And finally.The correlation between crude oil and broader risk assets has weakenedMost of the sharp falls in oil prices this year, including during the US banking crisis in March, have been driven by a stock market sell-off. While high interest rates, which weigh on equities, remain a headwind for crude, particularly as they raise the cost of storing oil and encourage refiners to sell it to the market, investment banks such as Goldman Sachs are abandoning recession bets and predicting a soft landing for the US economy.

Rebecca Babin, senior energy trader at CIBC Private Wealth, said in July,The increased participation of financial investors in the oil market should increase liquidity and provide a buffer against extreme volatilityHowever, these investors' lettersreadResilience remains an open question. She said:

"Unfortunately, because of some of the volatility in the first half of the year, hedge funds will be particularly sensitive to risk, so if things don't go their way, they can easily falter again."