The flames of war between the U.S. and Iran have reignited, and hedge funds are aggressively increasing their positions in oil, at the fastest pace in a decade

Author: Zhao Ying, Wallstreet News

The escalation of the US-Iran conflict is profoundly reshaping the global crude oil market landscape. Hedge funds are betting on Brent crude oil rising at the fastest pace in nearly a decade, as disruptions in the Strait of Hormuz and tightening fuel supplies are driving both oil prices and refining profits to soar.

According to Bloomberg, as of the week ending July 14, asset management institutions increased their pure long positions in Brent crude oil by 75,996 contracts to 357,154 contracts, marking the largest single-week increase since December 2016, with overall positions rebounding sharply from a seven-month low reached a week earlier. Meanwhile, oil prices have surged to about a month high over the past 10 days, following a cumulative decline of about 30% in the second quarter.

The immediate trigger for this round of position increases was the US resuming military strikes against Iran. Iran subsequently retaliated against its Gulf neighbors and launched maritime attacks on vessels transiting the Strait of Hormuz, severely compressing traffic through this critical chokepoint. Investor sentiment reversed sharply within a week—from previously worrying about oversupply to quickly moving to cover short positions.

Rapid Position Reversal, Bulls Return to the Market

The intensity of hedge funds' position increases this time is extremely rare in history. According to Bloomberg, citing ICE European futures weekly data, the weekly increase in long positions for Brent crude oil set a record high since December 2016, pulling overall positions back from a seven-month low.

This shift reflects the dramatic volatility in market sentiment. Just a week ago, investors were anxious about potential oversupply; however, with the US restarting strikes against Iran, the market quickly turned, and short covering became the dominant force, driving rapid accumulation of long positions.

Disruptions in Hormuz, Fuel Profits Hit Record Highs

The impact of the conflict on the global fuel market is also significant. Iran's attacks on vessels transiting the Strait of Hormuz have drastically reduced traffic through this waterway over the past 10 days, tightening global supplies of refined products such as diesel and gasoline, and pushing global refining margins to historic highs.

According to Bloomberg data, funds simultaneously increased their pure long positions in New York Mercantile Exchange heating oil by 1,868 contracts, raising total positions to 36,451 contracts, the highest level since the early days of the Iran war in March this year. The weekly increase in net long positions for Nymex diesel also reached the largest increase since before the war broke out in February.

Russian Exports Plummet, Supply Pressures Intensify

The supply tightness in the fuel market is not solely due to the situation in the Middle East. According to Bloomberg, ongoing attacks on Russian refineries by Ukraine over several months have led to a significant decline in Russian refined oil exports, prompting Moscow to announce a ban on diesel exports, further exacerbating the global fuel supply tightness.

The combination of these two supply shocks has particularly stressed the global diesel market and partially explains why refining profits have surged to historic highs in a short period, attracting continued capital inflows into related long positions.