The First Black Swan Arrived In 2020: The Tense Situation In The Middle East Led To Soaring Oil Prices.

The sudden tense situation in the Middle East in January 3rd made the global oil prices once again enter a soaring trajectory.

As of 19 January 3rd, the NYMEX crude oil futures contract price hovered around 63.96 U.S. dollars / barrel, or 4.55%, intraday rose to the highest value since May 20, 2019, 64.09 U.S. dollars / barrel.

"Geopolitical risk premiums continue to rise in most of Wall Street's hedge funds, which are betting on crude oil." Edward Bell, a commodities analyst at Emirates NBD bank, told reporters. After all, after the US attack resulted in the killing of senior officials in Iran, the market was worried that Iran would soon take tough counter-measures, including blocking the Strait of Hormuz to block the export line of crude oil in the Middle East, resulting in a sharp decline in global crude oil supply.

Reporters learned that the main driving force of NYMEX crude oil futures soaring in January 3rd was Wall Street's many event driven hedge funds. In contrast, the corporate guarantee has not yet entered the market.

The head of the Ministry of insurance, a domestic private petrochemical processing enterprise, told the twenty-first Century economic report that at present, the oil price increase may be a short-term phenomenon within the enterprise. As the tension in the Middle East tends to die down, the oil price will soon return to the reasonable fluctuation zone. Therefore, they do not think it is necessary to chase up the hedging of crude oil futures. However, they will always pay attention to changes in the Middle East situation. Once they show signs of deterioration, they will quickly initiate new hedging measures.

"In fact, I bought some NYMEX crude oil call options at the US $60 / barrel in the overseas crude oil options market today, which is partly against the deterioration of the Middle East situation and the continuous rise in oil prices." The above owners of private petrochemical processing enterprises in January 3rd said.

In the hedge fund FX Analytics partner David Gilmore, at present, the eyes of all kinds of rising oil prices are aiming at the southern port of Iraq. The reason is that 88% of Iraq's daily exports of about 3 million 400 thousand barrels of crude oil are transported through the southern ports to all countries in the world. Once Iran takes strong counter-measures, the southern Iraqi crude oil transport line "interruption" will further trigger the tightening of global crude oil supply and demand and the rise in oil prices.

"This is also the situation that most of the investment capital that has bought oil prices before the OPEC has adopted a new production reduction agreement is most willing to see, because they will achieve the expected return at a faster pace." He speaks frankly.

The parties' reactions are different.

In the view of many Wall Street hedge fund managers, the biggest beneficiary of the sudden tense situation in the Middle East is betting on OPEC's capital to buy up oil prices by adopting a new production reduction agreement.

CFTC data show that by January 2019, OPEC adopted a new production reduction agreement (including an additional 500 thousand barrels / day reduction in the first quarter). As of December 24th last week, asset management institutions such as commodity hedge funds increased their net positions of 7622000 barrels of NYMEX crude oil compared with the previous week. In addition, crude oil traders' NYMEX crude futures net multiple positions increased by 9691000 barrels compared with the previous week.

"The market once speculated that they pushed the oil price up in January 3rd." David Gilmore told reporters. But this speculation quickly broke down, because the market soon found that the real behind the scenes promoter was the market driven fast response event driven hedge fund.

Reporters learned that in most event driven hedge fund investment models, the tension in the Middle East has long been an important factor in buying up oil prices. Once the situation in the Middle East suddenly becomes tense, the weight of the factor in the investment model will suddenly increase dramatically. The "guided" investment model automatically buys large quantities of NYMEX crude oil futures and keeps up with the oil price.

"In the early morning of January 3rd, 10 point -11 point NYMEX crude oil futures prices suddenly surged more than 4% during the period, the auto driven oil price event driven hedge fund funds reached at least 700 million -8 billion." David Gilmore told reporters that in fact, the amount of speculative capital for buying up oil prices was not high because the sudden tense situation in the Middle East was in the Asian trading session, and a large number of European and American event driven hedge funds did not "participate", so there was no increase in oil prices. However, with the advent of trading hours in Europe and America, the European and American event driven hedge funds will not be excluded from continuing to overweight NYMEX long positions, boosting oil prices to continue to rise.

Compared with event driven hedge fund funds, the corporate guarantee market appears to be "too late".

A number of domestic chemical enterprises' hedging Department traders told reporters that although senior executives believed that the death of high-ranking officials in Iran had caused a huge impact on the stability of the Middle East and the safety of crude oil exports, but before the Middle East geopolitical risk was not clear, they did not want to bet on oil prices continuing to rise.

"After all, some domestic private chemical enterprises took advantage of the tension in the Middle East to buy large oil futures arbitrage instead of losing it, so this time we learned a lesson and did not dare to catch up." The above owners of private petrochemical processing enterprises revealed their responsibility. However, some chemical companies bought some overseas crude oil options in January 3rd, which led to a rise in operating costs by locking down the procurement cost of crude oil raw materials in the future to avoid soaring oil prices.

Geopolitical risk premium divergence again

With the sudden tense situation in the Middle East in January 3rd, how high is the geopolitical risk premium of oil prices, which makes many Wall Street investment institutions widen.

Barclays strategist Maneesh Deshpande told reporters that in the current tense situation in the Middle East, the geopolitical risk premium of crude oil is at least 6-8 U.S. dollars / barrel. If Iran takes strong counter-measures (including blockade of the Strait of Hormuz to block the Middle East crude oil transport line), the premium rate will rise to 12-15 dollars / barrel at once.

However, this view has been rebutted by many financial institutions.

In the view of Helima Croft, head of global commodity strategy at RBC Capital Markets, the current oil price has been fully included in the geopolitical risk premium. Because the price valuation model of his institution shows that since the US government restarted sanctions against Iran, the price of NYMEX crude oil futures has always been higher than the actual equilibrium price by 5-6 US dollars / barrel, which indicates that in the past period of time, given the tense situation in the Middle East, the reasonable premium of the global financial market for geopolitical risks of crude oil is 5-6 dollars / barrel.

Reporters have learned that despite the serious market divergence, most hedge funds tend to further raise the geopolitical risk premium of US $3-4 / barrel in the short term, reaching US $10 per barrel. The reason is that the tension in the Middle East is attracting a large number of funds to return to the crude oil futures market, so that the price of crude oil will expand.

"The underlying reason behind this is that the negative interest rate environment has led to a sharp decline in the yield of global fixed income assets, which has dragged down the performance of global information management institutions. Therefore, when the tense situation in the Middle East makes the crude oil market have a strong buying opportunity to gain profits, these institutions will never miss this opportunity to increase investment returns." David Gilmore told reporters. Based on this logic of investment profit, many information management agencies will continue to chase gold profits, because as long as the tense situation in the Middle East suddenly tense, a large number of Middle East tycoon funds will pour into gold hedging, which can also provide considerable investment returns to the AIS.

As of 19 January 3rd, the COMEX gold futures contract price hovered around 1551.38 U.S. dollars / ounce, or more than 1.4%, after hitting the highest value since September 5, 2019, 1553 U.S. dollars / ounce.