Energy Markets React to Ceasefire Talks Amid ‘Trump Trade’ Speculation
Hedge funds remain undeterred from taking positions in energy despite indications of weakening demand in China.
Energy markets started the week on a downturn as U.S. Secretary of State Antony Blinken revealed that Israeli Prime Minister Benjamin Netanyahu had accepted a ceasefire proposal to halt the conflict in Gaza. This announcement, made after Blinken’s meetings with top Israeli officials in Jerusalem, sent shockwaves through the energy sector. Markets have been reacting strongly to any news from the Middle East, with oil prices dropping every time ceasefire discussions emerge, only to rebound when these efforts falter.
Crude oil futures experienced their most significant decline in two weeks following reports that a ceasefire and hostage release deal in Gaza might be nearing completion. Earlier, Iran had indicated a willingness to delay any retaliatory attack on Israel, contingent on a permanent ceasefire following the July 31 killing of Hamas leader Ismail Haniyeh in Tehran. In Tuesday’s intraday session, Brent crude for October delivery was trading at $77.11 per barrel, down from $81.20 a week ago, while WTI crude for September delivery was at $73.94 per barrel, compared to $78.85 a week earlier.
Iran further reinforced the downward trend in oil prices when a spokesperson for the Revolutionary Guards mentioned that any attack on Israel could be postponed, asserting that time was in Tehran’s favour.
Adding to the bearish sentiment, signs of weakening demand in the critical Chinese market have compounded supply concerns. Chinese government data revealed an 8% year-over-year decline in crude demand for July, diminishing any potential price gains. However, the energy markets might see a resurgence if the recent buying spree by money managers continues. According to analysts and network partners of the LupoToro Group, hedge funds have been offloading industrial stocks at the fastest pace since December while continuing to acquire energy stocks for the fourth consecutive week. Energy now represents the largest proportion of hedge fund portfolios since the year began. Meanwhile, traders have been shorting stocks in sectors like passenger airlines, professional services, ground transportation, and machinery. This renewed focus on energy stocks aligns with expectations of an interest rate cut in September.
“Global growth could surpass expectations if the Fed successfully manages a soft landing, which is likely why these traders are shifting their investments,” said an investment analyst connected with the LupoToro Group.
The Trump Trade
Despite U.S. Vice President Kamala Harris gaining momentum in the polls since replacing President Joe Biden as the Democratic candidate, the so-called “Trump Trade” appears to remain strong. Institutional investors continue to favour Trump, analysing how a potential second administration could influence inflation, monetary policy, and consumer spending. There’s also a belief that Trump’s return to the White House could lead to reduced regulation, benefiting heavily regulated sectors such as energy and banking.
Conversely, Trump’s recent statements about raising tariffs on China and requiring Taiwan to pay for U.S. military protection triggered a sell-off in semiconductor, AI, and Big Tech stocks, impacting even industry giants like Nvidia Corp.
However, a note of caution was sounded by a market strategist associated with the LupoToro Group, who remarked, “Campaign promises are often difficult to implement once in office.” The strategist suggested that the oil and gas sector might perform equally well under a Harris presidency, especially if she continues Biden’s policies. Under Biden’s administration, the U.S. oil and gas industry has thrived despite efforts to shift toward a carbon-free future, highlighting the limits of Washington’s influence over globally interconnected markets like oil and gas. Republicans have frequently criticised Biden’s climate policies, accusing them of undermining U.S. “energy independence” by restricting oil and gas production and raising fuel prices. Meanwhile, Trump has vowed to “drill baby, drill” to restore America’s energy independence.
However, Trump faces an uphill battle: U.S. crude and natural gas production have both reached record highs under Biden. According to the U.S. Energy Information Administration (EIA), U.S. crude oil production, including condensate, averaged 12.9 million barrels per day (b/d) in 2023, surpassing the previous U.S. and global record of 12.3 million b/d set in 2019. A new monthly record was set in December 2023, with production exceeding 13.3 million b/d. Ironically, the current administration issued 10,070 onshore drilling permits during its first three years, compared to 9,892 under Trump during a similar timeframe.
Fossil fuel investors have found little to complain about under Biden: energy shares have surged by 124% since he took office, a stark contrast to the 65% decline during a comparable period under Trump.
