Hedge funds had pushed bullish bets in the oil market to their highest level in six years just before it experienced one of its most volatile weeks on record. According to data, asset managers increased their net long positions in Brent crude by 65,438 lots to 351,032 lots in the week ending March 10, reaching the highest level since February 2020. Meanwhile, data from the U.S. Commodity Futures Trading Commission (CFTC) showed bullish bets on U.S. crude also rose to an eight-month high, indicating that market sentiment had spread comprehensively across the two global benchmark contracts.
Traffic through the Strait of Hormuz, a passage that normally carries about one-fifth of the world’s oil supply, has been at a near standstill for nearly two weeks. This prolonged disruption has caught many market participants off guard. Previously, many had anticipated that the joint U.S.-Israeli action would be a precise, surgical strike and had not fully priced in the risk of a sustained supply disruption. However, the evolution of reality has forced the market to reassess the geopolitical risk premium, transforming concerns over supply disruptions from an expected risk into a tangible shock.
Pressure on the supply side has moved from paper markets to the physical realm. With storage capacity nearing saturation, several major crude-producing countries in the region have been forced to cut output. Simultaneously, some refiners have begun defaulting on contracts, further exacerbating supply chain tightness. The shock to the energy market has left both producers and refiners struggling, with both ends of the market moving in tandem: crude producers rushed in to lock in future revenue, while the consumption side saw panic hedging demand, scrambling to buy protective positions to guard against further spiraling price increases. This two-way superposition of buying further amplified the market’s directional momentum and volatility.
In the derivatives market, several volatility indicators have risen to their highest levels since the outbreak of the Russia-Ukraine conflict. Algorithmic traders have increased long positions to their limits, while options trading activity was significantly suppressed as market makers reduced risk exposure. Hedge funds entered the market aggressively during this period, with net long positions in Brent crude increasing by over 65,000 lots in a single week to 351,032 lots, the highest level since February 2020. For U.S. crude, bullish bets simultaneously rose to an eight-month high, indicating that bullish sentiment has spread fully. The outbreak of war involving Iran is the core driver of this wave of betting. With the Strait of Hormuz, a critical global energy choke point, brought to a near standstill, the market’s concern over supply disruptions has transformed from an anticipated risk into a tangible shock.
