Black gold rush: Energy hedge funds’ bullish bets pay off as oil soars to near-three-year highs

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Black gold rush: Energy hedge funds’ bullish bets pay off as oil soars to near-three-year highs

Oil wells

Energy-focused hedge funds are capitalising on oil’s continuing price surge, as the commodity hit its highest level since 2018 this week.

Hedge fund managers that trade across the oil market and energy equities spectrum have generated eye-catching double-digit returns this year, as bullish bets built around price rises driven by reopening economies pay off.

US prices – as measured by the West Texas Intermediate crude benchmark – topped USD75 per barrel for August on Thursday, while Brent crude soared above USD76 per barrel, levels last seen around October 2018.

RCMA Capital’s long-running Merchant Commodity Fund – which trades commodity derivative markets by combining a fundamental supply-and-demand analysis with real-world cash price information – has advanced 57 per cent this year to the end of June.

The strategy has benefitted from correct calls on broken commodity supply pipelines and the rush towards decarbonisation, which is creating “unintended consequences” for commodity supply and demand, said Conor O’Malley, head of research at RCMA.

“These themes keep recurring in all the markets that we trade: oil, gas, agriculture, freight and industrial commodities,” O’Malley explained. “Everything from the availability of vegetable oils and the mandated need for carbon credits to the cost of freight are all impacted by these two themes. Both are not fixed easily nor fixed quickly. Both are, of course, inflationary. And both will need a lot of time and money to fix.”

Meanwhile, the Westbeck Energy Opportunity Fund – Westbeck Capital Management’s flagship long/short directional hedge fund strategy which trades oil equities, futures and options – rose almost 67 per cent in the first five months of 2021, with its YTD performance now matching last year’s full-year returns.

Westbeck has taken a particularly bullish stance on oil for much of this year, and recently predicted prices could hit USD80, as demand reaccelerates over the summer and supply tightens.

“Looking beyond 2021, the probability of a price spike akin to 2007-2008 – achieving new record prices – is increasing in our view,” the manager said in a recent update. “ESG forces are further handicapping the industry’s ability to invest in new supply when the world should, instead, start worrying about global spare capacity being tested as early as next year.”

Thursday’s spike comes a little over a year since WTI futures contracts slumped into negative price territory for the first time ever as demand for oil dried up as the Covid-19 pandemic upended markets.

O’Malley said the oil market remains suppressed by regional restrictions on mobility – particularly in air travel – while supply is distorted by the “aggressive” actions of OPEC+.

“The fact that Iran is still negotiating to get its oil back on the market offers global refiners little choice but to buy whatever crude is available now and worry about the underlying health of demand tomorrow,” he added.

“It must be noted that all of this is happening against the most supportive macro-economic backdrop: government fiscal generosity coupled with central bank liquidity.”