Brent Crude Oil's Return to Triple Digits: The SPR Dilemma
How Hedge Fund Behavior Shaped Energy Stock Prices
Last week, the price of Brent crude oil surpassed the average price at which President Biden sold oil from the Strategic Petroleum Reserve (SPR). As a result, the United States now has oil prices approaching triple digits once again. However, this decision to sell SPR oil means there are now about 200 million fewer emergency barrels of oil in reserve.
Interestingly, even as oil prices were on the rise, energy stocks didn't experience a proportionate increase in their prices. This anomaly even caught the attention of the big banks, including JPMorgan, who pointed out this trend in their recent upgrade of the energy sector.
One possible explanation for this disparity is the behavior of hedge funds. While commodities like oil were surging, hedge funds were showing a strong preference for technology and artificial intelligence (AI) stocks just before these tech stocks experienced a decline. Simultaneously, hedge funds were actively betting against energy stocks through short selling. This led to a situation where cumulative net trading flow in energy stocks reached its lowest point this year as of early August. Now, things are looking very different. Flows in to energy are on the rise. This surge in buying was primarily due to investors closing out their short positions (short covering) in energy stocks, and initiating new long positions by purchasing these stocks.
The recent surge in oil prices, driven by various factors, including the depletion of the SPR reserves, has not been fully reflected in the prices of energy stocks. Hedge funds, which were favoring tech and AI stocks, were simultaneously shorting energy stocks, contributing to this unusual market dynamic. If we get a break out in the XLE we could see a major move higher in energy stocks. All of the ingredients are here.
