Hedge funds ramped up their bullish wagers on oil at the quickest pace since March, largely in response to mounting geopolitical risks emanating from the Middle East. This increased speculative buying contributed to a robust performance in oil markets throughout July. Brent crude futures settled up $1.09, or 1.2%, at $90.12 a barrel, while U.S. West Texas Intermediate (WTI) futures closed up $1.08, or 1.3%, at $84.67 a barrel on the final trading day of July. For the entire month, Brent gained 24% and WTI rose 21%, marking their largest monthly increases since March.
The primary driver behind this surge in bullish sentiment and oil prices was escalating concerns over global crude flows, particularly from the Strait of Hormuz. Iranian reports indicated that some tankers were forced to turn back in the Strait, a critical chokepoint that previously handled about a fifth of global crude oil and natural gas supplies. Since the conflict began on February 28, Iran has significantly curtailed shipping through the Strait. Additionally, Houthi allies in Yemen threatened vessels transiting the Bab el-Mandeb strait at the southern end of the Red Sea, endangering an alternative export route used by Saudi Arabia and other regional producers.
While oil prices saw some fluctuations with news of improving shipping through the Gulf, the overarching geopolitical risk premium remained firmly in place, according to research firm Gelber & Associates. The market's conviction in these high prices was evident in intraday trading, where Brent traded at $89.50 and WTI at $83.63 before news of tanker attacks. The attacks on two tankers, with four others turning back, removed six vessels from a flow of 14 per day, representing a more than 40% single-day hit to throughput. This incident, especially involving ships under U.S. military escort, significantly elevated insurance and risk calculations for all owners considering the route.
Analysts from a Reuters survey of 31 economists forecast that Brent crude would average $85 a barrel in 2026, an increase from June's forecast of $84.50. This indicates an expectation of continued higher oil prices. Furthermore, U.S. commercial crude stockpiles last week fell to their lowest levels since 2018, contributing to supply concerns. The U.S. Strategic Petroleum Reserve (SPR) is also running low, with releases expected to cease soon, which analysts believe will further push prices upward once draws end.
Despite the significant gains, some market observers, like John Kilduff, a partner at Again Capital, noted a perception that ample supply is waiting to hit the market once geopolitical issues are resolved. However, the current disruptions continue to underscore the market's sensitivity to supply chain issues. The Brent-WTI spread narrowed to about $5, down from an average of $12 in March, suggesting that the disruption premium is being priced globally rather than regionally, affecting both benchmarks similarly.
