Author: Zhao Ying, Wall Street Insight

The escalation of the US-Iran conflict is profoundly reshaping the global crude oil market landscape. Hedge funds are betting on Brent crude oil rising at the fastest pace in nearly a decade, as disruptions in the Strait of Hormuz and tightening fuel supplies are driving both oil prices and refining profits to soar.

According to Bloomberg, as of the week ending July 14, asset management institutions increased their net long positions in Brent crude oil by 75,996 contracts to 357,154 contracts, marking the largest single-week increase since December 2016, with overall positions significantly rebounding from a seven-month low reached a week earlier. Meanwhile, oil prices have skyrocketed to about a one-month high over the past 10 days, following a cumulative decline of approximately 30% in the second quarter.

The immediate trigger for this increase in positions was the US resuming military strikes against Iran. Iran promptly retaliated against its Gulf neighbors and launched maritime attacks on vessels transiting through the Strait of Hormuz, severely constricting the traffic through this critical choke point. Investor sentiment reversed sharply within a week—from concerns about supply surplus to a rush to cover short positions.

Positions Rapidly Reversed, Bulls Return to the Market

The strength of the hedge fund's position increase this time is historically rare. According to Bloomberg, citing ICE European futures weekly data, the long position in Brent crude oil saw its largest single-week increase since December 2016, pulling overall positions back from a seven-month low.

This shift reflects the intense volatility in market sentiment. Just a week ago, investors were worried about a potential supply surplus; however, with the US restarting strikes against Iran, the market quickly turned, and short covering became the dominant force, driving rapid accumulation of long positions.

Strait of Hormuz Disruptions, Fuel Profits Hit Record Highs

The impact of the conflict on the global fuel market is equally significant. Iran's attacks on vessels transiting the Strait of Hormuz have dramatically reduced traffic through this waterway in the past 10 days, consequently tightening the global supply of refined products such as diesel and gasoline, driving global refining margins to historical highs.

According to Bloomberg data, funds simultaneously increased their net long positions in New York Mercantile Exchange heating oil by 1,868 contracts, bringing total positions to 36,451 contracts, the highest level since the outbreak of the Iran War in March this year. The single-week increase in net long positions for Nymex diesel has also recorded its largest gain since the outbreak of the war in February.

Russia's Exports Plummet, Supply Pressures Intensify

The tight supply in the fuel market is not solely due to the situation in the Middle East. According to Bloomberg, Ukraine's ongoing assaults on Russian refineries over the past several months have led to a significant decline in Russian refined oil exports, with Moscow subsequently announcing a ban on diesel exports, further exacerbating the global fuel supply tightness.

The combination of two major supply shocks is particularly pressuring the global diesel market, which also partly explains why refining profits have surged to historical highs in a short time and attracted continued influx of funds into related long positions.

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