At the start of the year thanks mostly to unstoppable rally in crude, commodities were attracting a lot of media hype and interest from investors. New investment vehicles such as commodity-based hedge funds were launched, and fueled interest in underlying commodity futures markets.

But crude oil prices have been trading weak for few days now, the market is divided between two camps, one camp has estimated an upward target of around $100 while others feel that prices could go lower, and trade in the range of $60 to 65 per barrel.

Hedge funds across the globe have approximately $100 billion invested in crude oil. The earlier expectation was that they would stay invested in this commodity because price of crude oil was expected to go up.

But, depending on the outcome of the situation in the Middle East, prices may not be likely to go up. This would mean funds pulling out from oil futures and the same funds finding its way into equities. This in turn will increase liquidity and maybe would give a push to the markets movement. This can also lead to a drop in the crude oil prices in the world market.

According to market experts, even if hedge funds park their investments into equities, this will not be very significant and will not give a major fillip to the market, as it is a common feature for hedge funds to keep shifting funds from one commodity to the other.

Hedge funds had a substantial influence on underlying commodities markets as participants in the futures markets that also influence price action. As the launches of these new funds grew imminent, market participants reacted in anticipation of their impact on various commodity markets, driving prices higher. Game theory would dictate “get long in front of them,” embrace the theme, and enjoy the wave of cash upsetting the market’s fundamental balance and pushing prices to exaggerated levels.

The vast majority of investment in commodities, which bankers reckon might be as much as $200 billion, is through passive indexes like the Goldman Sachs Commodities Index, but UBS said hedge funds might be a better bet.

While the two camps are putting up their own arguments, recent research shows that at present as well as in the long term there are enough reserves of crude oil in the world. The World Crude Oil Reserves have risen to 1.3 trillion barrels, more than double in last twenty years. Twenty years from now the reserves are estimated to be 2.96 trillion.

Alex Akesson
Contributing Writer
HedgeCo.Net
Email: Editor@hedgeco.net