This year, professional investors – investment and hedge funds, investment banks with divisions for trading in raw materials – actively used the situation that had developed on the global oil market. The growth in demand for raw materials from developing countries and the global economy emerging from stagnation, coupled with the problems of increasing its production, brought prices to a qualitatively new level. However, recently the market has become increasingly speculative: seeing how prices are growing (and from the beginning of the year to August 20, when a peak of $49.4 per barrel was reached in New York, they jumped by 53.3%), other categories of investors decided to participate in the growth. Many investment banks and brokerage companies began to create departments for trading in raw materials, and mutual funds and pension funds entered the market. On the eve of August 20, non-commercial investors accounted for 28% of open long positions (i.e. for purchase) in oil futures on the NYMEX exchange; At the beginning of 2002, this figure was 13%.

Over the past two weeks, the situation has changed. Major financial players have begun to change their investment strategies. Some hedge funds have begun to exit the oil market, deciding that it is getting ahead of itself. According to the Commodity Futures Trading Commission, the number of futures contracts held by non-commercial investors fell 10% in the week ending Aug. 24, to 679,708. Of these, 119,236 were buy contracts, down 13,906 from the previous week.

“Geopolitical tensions have eased a bit, and speculators have started to pull money out [of the market],” said Citigroup analyst Dog Leggate. He estimates that speculative positions have fallen 25% in the past week. Like many analysts, he believes oil could fall to about $35 a barrel.

“A little over 10 days ago, a lot of [market participants] were long, expecting a breakout through $50,” says Jamie Philip, senior commodities trader at London-based hedge fund Aspect Capital. When that didn’t happen, funds including Aspect Capital began to unwind those positions. That sent prices tumbling.

However, most believe that the price will not fall below $35 in the long term, so it is possible to continue playing the commodity market. The new strategy involves investing in shares of oil and gas companies, which look relatively cheap because they have not kept up with the growth of oil prices. Even if oil prices do not rise in the next few years, but remain at the current level (and even if they fall to $35), the cash flow of oil companies will be high and their shares will rise, analysts say. OSX, an index of shares of oil service companies traded on the Philadelphia Stock Exchange, has risen by 7.5% since August 20, while the price of October oil futures has fallen by 8.6% (yesterday in day trading it was $45.15). (WSJ, 09/02/2004, Mikhail Overchenko)

Investors change strategy