Against the rare backdrop of simultaneous supply disruptions at the world’s three key energy shipping chokepoints—the Strait of Hormuz, the Red Sea’s Bab el-Mandeb Strait, and the Black Sea—hedge funds are returning to the U.S. crude oil market at their fastest pace since March this year. Data from the U.S. Commodity Futures Trading Commission (CFTC) show that in the week ended July 28, money managers increased their net long positions in WTI crude oil by a substantial 21,402 contracts to 108,307 contracts, marking the largest single-week increase in nearly four months. Speculative bullish sentiment toward WTI crude has climbed to its highest level since mid-June. Meanwhile, net long positions in U.S. gasoline rose to a four-month high, while diesel long positions hit their highest level in nearly five months.
Over the past several weeks, hedge fund positioning in WTI crude has undergone a notable shift from “hesitation” to “explosion.” In the week ended July 7, net long positions had decreased by 19,507 contracts to 65,681 contracts, marking the third consecutive week of reductions. However, as the U.S.-Iran conflict continued to escalate and the Strait of Hormuz was once again blockaded, speculative funds began to reverse direction. In the week ended July 14, net longs increased by 11,704 contracts to 86,383 contracts; thereafter, the pace of position-building accelerated, with net longs edging up 0.6% to 86,905 contracts in the week ended July 21; and in the week ended July 28, positions surged by 21,402 contracts in a single week, the fastest pace of increase since March.
In contrast to the fervor surrounding WTI crude, speculative bullish bets on Brent crude remained largely stable, with net longs only slightly decreasing by 6,948 contracts to 185,083 contracts. This divergence clearly indicates that amid simultaneous disruptions to multiple global supply routes, U.S. crude is being viewed as the most certain “last supply buffer.”
Behind the aggressive positioning build by hedge funds lies a supply crisis unfolding simultaneously across three major geographic regions. The first is the renewed closure of the Strait of Hormuz. Following the outbreak of the U.S.-Iran war in late February, the strait was largely closed; shipping briefly resumed after a temporary ceasefire in mid-June, but since July 12 the truce has been deemed “effectively void,” and the strait has again become largely closed, with tanker traffic nearly halted. The second is the threat in the Red Sea’s Bab el-Mandeb Strait. After the closure of the Strait of Hormuz, Saudi Arabia shifted its crude exports en masse to the Red Sea port of Yanbu, with export volumes surging from roughly 970,000 barrels per day a year ago to over 4.5 million barrels per day. However, Iran-backed Houthi forces in Yemen announced a “maritime embargo” against Saudi Arabia on July 20 and attacked two Saudi tankers in the Red Sea. If the Bab el-Mandeb Strait is fully blockaded, the bulk of Saudi oil exports would be obstructed, reducing global supply by an additional approximately 7%. The third is the emergency in the Black Sea. From July 17 to 20, four tankers loading at the Caspian Pipeline Consortium (CPC) terminal were struck by Ukrainian drones, causing the terminal to suspend operations and forcing Kazakhstan to cut its daily oil production from 2.07 million barrels to 1.63 million barrels.
Even more concerning, according to a report by Germany’s Der Spiegel, the global oil market is simultaneously suffering from a “fivefold shock.” In addition to the three supply lines mentioned above, Ukraine’s sustained attacks on Russian refineries have reduced Russian refinery throughput to its lowest level in 21 years, and Moscow has largely banned diesel exports; meanwhile, the U.S. Strategic Petroleum Reserve is being rapidly depleted due to heavy exports.
Amid this multi-layered crisis, U.S. crude is emerging as the “last lifeline” for which global buyers are fiercely competing. Although U.S. crude exports are already at historic highs, traders expect export volumes to climb further. Its appeal lies in its “geographic immunity”—being unaffected by the geopolitical risks of Hormuz, Bab el-Mandeb, and the Black Sea. When the world’s three major shipping routes are simultaneously obstructed, crude from the Gulf of Mexico becomes one of the few incremental supply sources still able to flow freely to international markets. However, this “safety buffer” is not unlimited. The U.S. Strategic Petroleum Reserve has been rapidly depleted by heavy exports, while domestic shale producers cannot fully compensate for the global supply shortfall of millions of barrels per day in the short term. Warning signals are also flashing in the refined products market, with the market not only betting on rising crude prices but also on further expansion of refining margins.
