In the thrilling world of investment, fortunes can change in a flash, reminiscent of my early adventures in the Bitcoin and GME days.
And so, dear readers of Investing Pioneers, we witness the drama of hedge funds and their love affair with crude oil this year.
To set the scene, many hedge funds, lulled by the promise of restricted Russian output and a boom in Chinese demand, entered 2023 with high hopes of soaring oil prices.
However, the unpredictable actors of recession fears, U.S. banking disturbances, and surprising Russian oil flows threw the plot into chaos.
Our protagonist, oil trader Pierre Andurand, felt the sting acutely with his fund experiencing its worst-ever run in the first half.
But, as any seasoned investor like yours truly knows, the game isn’t over until it’s over.
By the second act, hedge funds reversed their fortunes, influenced heavily by OPEC+ output reductions and extension of unilateral cuts by powerhouses Saudi Arabia and Russia.
These measures sent crude skyrocketing by a dramatic 30% since mid-June. It’s reminiscent of the kind of resurgence I saw during the GME short squeeze.
Michael Tran, from RBC Capital Markets, insightfully remarked that the oil market has transformed into a momentum-based game as much as it is fundamentally rooted.
But, the allure of the market, friends, is that caution is ever-present.
Despite Saudi Arabia and Russia’s significant supply curbs, the ghost of the first half’s losses still haunt many funds, acting as a potential damper on their convictions.
Delving deeper, we notice the unexpected surge of Russian oil in the market.
Francisco Blanch of Bank of America Corp. highlighted the gap in Russia’s projected oil balances, which certainly took many by surprise.
Who would’ve thought we’d see such a massive influx of Russian oil amidst such anticipations?
Moreover, China, once the jewel in the crown of oil demand expectations, proved to be a double-edged sword.
Early 2023 data showcased a diminished demand, with flight activity reduced to a mere 39% of pre-pandemic levels.
As Ed Morse of Citigroup Inc. aptly put it, “The bulls got global recovery wrong.”
Yet, as we transition into the latter half of 2023, there are signs of hope.
With China’s jet fuel production on an upward trajectory and global oil demand forecasts looking promising, the bulls might just have their day in the sun again.
However, an interesting subplot develops.
The correlation of crude with broader risk assets seems to be on the decline.
While factors like higher interest rates, influenced by equity market dynamics, have been impediments for crude, some, like Goldman, are optimistic about a softer economic landing.
In closing, dear readers, the 2023 crude oil saga presents a mesmerizing blend of strategy, anticipation, and sheer unpredictability.
While financial investors’ increased activity might act as a buffer against extremes, the strength of their conviction remains in suspense.
As Rebecca Babin from CIBC Private Wealth aptly mentioned, the resilience of hedge funds remains to be tested.
To my fellow investing pioneers, the crude oil narrative of 2023 reminds us that, like in all investments, timing, knowledge, and a sprinkle of luck play crucial roles.
And as for strategies, always keep an ear to the ground, diversify those portfolios, and never underestimate the power of resilience.
Until the next twist in our tale, keep pioneering.
Peter Burke
