Investors are increasingly turning to crude oil futures as a hedge against potential inflation sparked by U.S. trade tariffs. This strategy is adding fuel to the recent oil price rally, already driven by tightened sanctions on Russia.
Oil serves as a popular inflation hedge because energy significantly impacts Consumer Price Index (CPI) baskets, both directly and indirectly through goods and services costs. However, widespread adoption of this hedging strategy could inadvertently contribute to higher consumer prices.
Commodity Futures Trading Commission data reveals that fund managers currently hold the largest net long position in crude oil futures in nine months. Francesco Sandrini, head of multi-asset strategies at Amundi, Europe’s largest asset manager, stated, “This is the best hedge at the moment…if inflation in the U.S. proves to be more resistant.” Amundi is responding by increasing its commodities holdings, specifically oil and metals.
While U.S. stock markets experienced pressure early this year and Treasury yields reached 15-month highs, oil and other commodities, typically considered higher-risk investments, defied expectations. Instead of falling, Brent crude and U.S. WTI futures prices have risen approximately 5% and 4% respectively year-to-date, recently hitting six-month highs.
Although the tightening of supply due to renewed sanctions on Russia’s energy sector remains a primary focus for oil traders, the potential for escalating inflation under proposed tariffs on countries like Mexico, Canada, and China is also causing concern among investors.
Saxo Bank’s analysis of CFTC data indicates that money managers’ net long position in a commodity basket encompassing energy, metals, and grains is nearing a three-year high, with crude oil contracts experiencing the strongest demand. Goldman Sachs research highlights energy’s historical outperformance among commodities in providing inflation-adjusted returns during periods of unexpectedly high consumer price increases.
Energy constitutes 6.4% of the U.S. CPI and 9.9% of the Eurozone equivalent, according to the U.S. Bureau of Labor Statistics and Eurostat. While rising energy prices can offset losses during inflationary periods, Ilia Bouchouev, author of “Virtual Barrels: Quantitative Trading in the Oil Market,” cautions that inflation hedging can create a “vicious circle.” He explains, “Investors buy oil futures to hedge against rising consumer prices, but this activity can push oil prices higher, fueling more inflation and more hedging trades.”
Recent economic indicators, including the U.S. jobs report and a University of Michigan survey showing increased consumer price expectations, have further amplified inflation concerns. Shaniel Ramjee, co-head of multi-asset at Pictet Asset Management, observes, “With strong growth combined with sticky inflation, markets anticipate a more cautious Fed. Higher oil prices also don’t bode well for the inflation outlook.”
The simultaneous decline in stocks and bonds, an uncommon market occurrence, has driven demand for investments perceived as less susceptible to concurrent value loss. John Roe, head of multi-asset at Legal & General Investment Management, notes that “Commodities are a good diversifier, up to a point. But if inflation scares lead to growth concerns, then they can get caught up in it,” highlighting the potential impact on demand.
Saxo Bank’s analysis also points to momentum trading funds entering the oil market rally. Additionally, commodity trading advisors (CTAs), typically relying on technical signals, are reversing their previous bets on falling crude prices, contributing to the upward price pressure. This shift in CTA positioning further reinforces the current trend in the oil market.
