Escalating US-Iran conflict has triggered a sharp reversal in oil market positioning, with hedge funds and other money managers piling back into bullish Brent crude bets at the fastest pace in nearly a decade. Disruptions around the Strait of Hormuz and tighter fuel supply have also lifted crude prices and refining margins.
According to Bloomberg, asset managers increased their net long position in Brent crude by 75,996 contracts in the week ended July 14, bringing the total to 357,154 contracts. That was the largest weekly increase since December 2016. Overall positioning had been sitting at a seven-month low a week earlier before rebounding sharply.
Crude prices moved higher as well. Over the past 10 days, oil climbed to about a one-month high after posting an accumulated decline of roughly 30% in the second quarter.
Positioning flips as shorts rush to cover
The immediate trigger for the buying wave was the resumption of US military strikes on Iran. Iran then retaliated against Gulf neighbors and launched maritime attacks on vessels passing through the Strait of Hormuz, cutting traffic through the key chokepoint.
That quickly changed the tone of the market. Just a week earlier, investors had been focused on the risk of oversupply. After the US resumed strikes on Iran, sentiment turned abruptly, and short covering became the main force behind the rebuilding of long positions.
Bloomberg, citing weekly futures and options data from ICE Europe, said the weekly increase in Brent bullish positioning was the biggest since December 2016, pulling total exposure back from a seven-month low.
Hormuz disruption sends fuel margins higher
The effect on fuel markets has been just as visible. Iranian attacks on ships transiting the Strait of Hormuz significantly reduced traffic over the past 10 days, tightening global supplies of diesel, gasoline and other refined products. Refining margins for processors worldwide climbed to record highs.
Bloomberg data also showed investors added 1,868 contracts to net long heating oil positions on the New York Mercantile Exchange, taking total holdings to 36,451 contracts. That marked the highest level since the early phase of the Iran war in March this year. Net long diesel positions on Nymex also recorded their biggest weekly increase since before the war began in February.
Russian export drop adds another supply shock
Tightness in fuel markets is not coming only from the Middle East. Bloomberg reported that months of Ukrainian attacks on Russian refineries have led to a sharp drop in Russian refined-product exports. Moscow then announced a ban on diesel exports, adding more strain to global fuel supply.
With supply shocks from the Middle East and Russia hitting at the same time, pressure has been especially intense in the global diesel market. That helps explain why refining profits surged to record highs in a short period and why capital kept flowing into related bullish positions.