By Anna Hirtenstein
LONDON (Reuters) – Investors are snapping up crude oil futures as a hedge against the risk that U.S. President Donald Trump’s threatened trade tariffs will cause a resurgence in global inflation, adding momentum to a recent rally in oil prices sparked by a tightening of sanctions on Russia.
Oil is a popular inflation hedge because energy is a important component of Consumer Price Index (CPI) baskets and also feeds into them indirectly through goods and services costs. That means, however, that the large-scale adoption of such a strategy could itself help push consumer prices higher.
Fund managers have built up the largest net long position in crude oil futures in nine months, according to data from the Commodity Futures Trading Commission.
“This is the best hedge at the moment…if inflation in the U.S. proves to be more resistant,” said Francesco Sandrini, head of multi-asset strategies at Amundi, Europe’s biggest asset manager overseeing 2.2 trillion euros ($2.29 trillion). Amundi is increasing its commodities holdings, buying oil and metals, he said.
In an environment where U.S. stock markets came under pressure at the beginning of the year and benchmark Treasury yields hit 15-month highs, prices of oil and other commodities considered higher risk investments would typically be expected to fall, particularly as a stronger U.S. dollar made them more expensive for holders of other currencies.
However, Brent crude and U.S. WTI futures prices are up around 5% and 4%, respectively, so far this year and recently traded at six-month highs.
While oil traders are focused on a tightening of supply from a fresh round of sanctions on Russia’s energy industry, some investors are concerned inflation may pick up if Trump presses ahead with threatened tariffs on countries such as Mexico, Canada and China despite the new president’s vow to lower consumer prices.
Money managers’ net long position in a basket of commodities that includes energy, metals and grains has risen close to a three-year high, an analysis of CFTC data by Saxo Bank shows, with crude contracts drawing the most demand.
According to Goldman Sachs, compared to other commodities energy has historically provided the strongest inflation-adjusted returns when consumer prices have risen faster than expected.
Energy forms 6.4% of the U.S. consumer price index (CPI) and 9.9% of the euro zone equivalent, according to the U.S. Bureau of Labor Statistics and Eurostat respectively.
If inflation is accelerating, it is likely that energy prices are picking up, which can offset losses. However, Ilia Bouchouev, former president of hedge fund Koch Global Partners and author of Virtual Barrels: Quantitative Trading in the Oil Market, said inflation hedging can be a “vicious circle”.
