By John Kemp
LONDON, Jan 9 (Reuters) - Escalating tensions between Iran and the West have so far drawn only a small amount of extra speculative money into oil-linked futures and options contracts.
Far fewer hedge funds and other money managers are wagering on a big price increase than after the Libyan civil war last year, according to position data released by the U.S. Commodity Futures Trading Commission (CFTC) and exchanges.
Money managers were running a net long position equivalent to 225 million barrels of oil in futures and options linked to U.S. crude (WTI) at the end of Jan. 3, according to the CFTC’s commitments of traders report on Friday.
It was a marked increase from the 165 million barrel net long position money managers were running at the start of October.
But it was not significantly different from the net position run through November and December 2011, and much smaller than the net position of 340-360 million barrels funds held between February and May last year after the Libyan civil war erupted and before the flash crash on May 5 (Charts 1-2).
The inflow of new hedge fund money into WTI-linked futures and options has been far smaller than in the aftermath of the Arab revolt. Hedge funds boosted their net long by around 23 million barrels in the two weeks ending Jan 3, compared with 133 million barrels as violence erupted across Libya in February 2011 (Chart 3).
Money managers are overwhelming bullish, with long positions (290 million barrels) outnumbering shorts (65 million) by more than 4:1, but their market positioning is a long way from last year, when the long/short ratio peaked at over 10:1 (Chart 4).
The really interesting comparison would be with Brent futures, since Brent is a better marker for seaborne international oil markets, rather than landlocked WTI. Unfortunately, Intercontinental Exchange (ICE) has only published comparable information since August 2011.
From the available data, however, hedge fund positioning in Brent appears similarly cautious, with funds running long (122 million barrels) rather than short (40 million barrels) positions by a margin of 3:1 at the end of 2011.
In the immediate aftermath of violence disrupting Libya’s oil exports, Brent prices jumped by around $15 per barrel (15 percent). So far geopolitical risks linked to Iran seem to have boosted oil prices less than $5 (under 5 percent).
Some analysts argue the political premium could be as high as $10-15. In their view, prices would now be under $100 per barrel in the absence of Iran, as the market worries about slowing global growth, falling oil consumption in the advanced economies, and the prospect of large new tight oil supplies.
In any event, the threat of more sanctions on Iran’s oil exports, and possible military confrontation between Tehran and the United States, Israel and their allies, appears to have had a relatively modest impact on hedge fund positions and prices so far.
Hedge funds are far from fully invested in the oil market. In the event tensions rise further, there is scope for funds to boost their positions by 100-150 million barrels or more, exerting further strong upward pressure on prices.
For the time being, though, most hedge funds appear unenthusiastic about trades linked specifically to Iran risk.