Are hedge funds moving out of crude oil?

Crude oil prices have been trading weak for few days now. Market is divided between two camps, one camp has estimated an upward target of around $100 /bpd while others feel that prices could go substantially lower and could trade in the range of USD 60-65 per barrel.

 

Crude oil traded near a one-week low in New York as Tropical Storm Ernesto veered away from the Gulf of Mexico oil and gas production area, easing concern that output may be disrupted.

 

Hedge funds across the globe have invested approximately USD 100 billion into crude oil. The earlier expectation was that they would stay invested in this commodity because price of crude oil was expected to go up.

 

But, the present scenario with the cooling of the tension in the Middle East with Israel and the favorable outcome expected out of Iran, suggests that prices are not likely to go up. This would mean funds pulling out from oil futures and the same funds finding its way into equities. This in turn will increase liquidity and maybe would give a push to the markets movement. This can also lead to a drop in the crude oil prices in the world market.

 

According to market experts, even if hedge funds park their investments into equities, this will not be very significant and will not give a major fillip to the market, as it is a common feature for hedge funds to keep shifting funds from one commodity to the other. They expect markets to touch its all time high not before March 31 or year-end.

 

But, Deven Choksey, KR Choksey Sec, a strong believer of this development, said, "if hedge funds withdraw money from crude oil, then possibly we will find a drop in the crude oil prices in the world market. The drop will be sharp and probably we will see prices stabilizing in the range of USD 60-65. If that does happen then we will see good amount of correction and the money will be pulled out from crude oil and probably might find its way into equities because investors across the globe who have given their money to hedge fund managers will obviously want their money to generate returns. If crude oil can't generate returns then equities will have to generate and therefore equities are a favorable destination."

 

But, SP Tulsian, Investment Advisor, does not agree to the fact that hedge fund's money moving into equities will help markets in anyway, because he believes that crude oil prices won't fall beyond USD 60-65.

 

"I don't agree to this. Crude oil prices have started falling. Some were saying that prices will go to USD 45/barrel, but that has not happened. Generally hedge funds keep moving their hot money from one commodity to another. They were earlier into non-ferrous metals, and then moved to crude. This is their regular feature. I don't see crude falling below USD 60-65. Even if the money has moved into stock markets, I don't know whether it would be appropriate to take a call, what is the time horizon we are talking about? I see markets going at all time high but it won't happen before March 31 or year-end."

 

continued on page 2