Luc Filip doesn’t work for a large energy company or an industrial company. He is not a day trader or an OPEC official. But it is still helping to fuel the rise in oil prices.
Mr. Filip is the Investment Director at SYZ Private Banking in Switzerland and he is very concerned that inflation is denting the $ 28.5 billion of client investments he manages. So he bought oil.
Fund managers like Mr Filip are contributing to a rally that has pushed oil prices to their highest levels since the 2014 energy crisis. While energy futures markets tend to be reserved for producers and commodity-focused hedge funds, an oil rally that is showing no signs of slowing is now pulling on traditional asset managers who manage portfolios of stocks and bonds.
Since commodity prices tend to rise with inflation, they can protect investment portfolios from their erosive effects. Combined with other commodities like copper and gold, energy is “a pretty decent hedge,” said Filip, who has bought energy futures and sold longer-term bonds that fall in value if inflation turns out to be longer than expected.
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Of course, fears of inflation aren’t the main reason the West Texas benchmark rose from $ 62 a barrel in August to $ 85 this week. The Organization of Petroleum Exporting Countries is sticking to its plan to increase production in small steps. A shortage of natural gas has led some industrial manufacturers to switch to diesel, which is refined from petroleum.
Untangling these inputs is difficult. However, traders and analysts say some of the recent oil gains could be explained by inflation concerns, especially on days with no news of supply that could fuel the trading of common players like commodity brokers and oil producers.
One sign of investor concern is that money is pouring into funds buying energy futures and stocks, accelerating as inflation fears took center stage this fall. These funds saw four consecutive inflows for the first time since spring, with $ 753 million last week, the highest weekly total in five months, according to data provider EPFR.
Data from the Commodity Futures Trading Commission showed an increase in speculative purchases of crude oil futures and options for the week ending October 19. Bets on $ 100 a barrel of oil – a price last recorded seven years ago – rose earlier this summer. This month, investors have bet on $ 200.
These investors, especially newcomers or buyers for ancillary reasons such as fears of inflation, run the risk that a sudden shock could plummet oil prices. It did so in the spring of 2020 when demand collapsed due to the Covid-19 pandemic as Saudi Arabia ramped up production.
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Energy is also a major contributor to the consumer price index, the most comprehensive measure of inflation. This means that investing in energy as a hedge against rising prices can be a self-reinforcing cycle: as oil prices rise, so does inflation, which sends money managers like Mr Filip back onto the energy market to replenish their protection.
“People are buying oil that will boost inflation expectations and be self-sufficient,” said Evan Brown, head of asset allocation at UBS Asset Management.
Inflation has moved from an expected and natural sequence of economies out of lockdown to a major source of investor anxiety. Higher prices weigh on the returns on fixed income bonds and loans. Shares in companies that cannot easily pass the higher costs on to customers also suffer.
US consumer prices rose at an annual rate of 5.4% faster than in August and just below a 30-year high. Germany’s annual rate of 4.5% in October was the strongest year-on-year increase since 1993.
Central bankers in the US and Europe say higher prices are likely to be temporary and will subside once the delays in the supply chain are resolved and economies function through reboots. But investors aren’t so sure. In addition to more traditional inflation hedges, such as bonds, whose returns are linked to consumer prices, they pour into commodities.
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Brown, who puts together portfolios worth around $ 1.2 trillion in client assets at UBS, recommends commodity futures, energy stocks and currencies of oil-rich countries such as Russia and Canada. John Roe, head of multi-asset funds at Legal & General Investment Management, said he was protecting his investments with Chilean pesos, which are linked to the price of copper, and stocks of gold mining companies against escalating prices.
So far the strategy seems to be working. Inflation is rising, but so are the prices for energy and many metals. Paul O’Connor, director of multi-asset at Janus Henderson, warned that this may not last.
Today’s inflation is fueled by sticky supply chains that have tightened almost everything and are driving up commodity prices. However, he expects future inflation to be more driven by rising wages, and it is less clear whether that would have the same impact on commodity prices. “Pretty questionable,” he said of the strategy.
