Institutional money flows into oil are playing a big part in its advance to record peaks, a portfolio manager at commodities hedge fund Tiberius said on Friday.
He said the latest rally in commodities started when the U.S. Federal Reserve cut its discount rate in August to help ease the credit market crisis triggered by bad loans in the U.S. mortgage sector.
But the shift in the structure of the oil market to backwardation from contango also played a big part.
A lot of institutional capital is attracted by the backwardation that is in the oil market today, said Markus Mezger, who manages investment portfolios at Tiberius.
Backwardation occurs when commodity prices nearby are higher than those in the future. Contango is the opposite structure where prices further forward are higher than nearby.
Backwardation means investors can make money simply by buying nearby commodity futures contracts and then roll them forward each month when the nearby contract expires.
A lot of institutions have taken advantage of the positive roll-yield and I think we had a good inflow of institutional capital, Mezger said.
Speculative positions in commodity futures, as tracked by the U.S. Commodities Futures Trading Commission, have also risen.
It has risen very much in the last three months - so there is a little bit overheated sentiment for commodities as a whole, he said.
But Mezger believed not a lot of fresh capital was coming into the oil market now from the hedge fund sector, it was more that they were closing out of short positions.
It's more or less nobody wants to be short in this market, Mezger said.
Tiberius has a neutral stance on oil at the moment.
We don't find that prices are supported fundamentally above $80, Mezger said.
Oil's latest ascent to fresh peaks followed publication on Wednesday of U.S. inventory data which revealed a surprise 5.3 million barrel fall in crude oil stocks last week.
Mezger said there was too much emphasis on U.S. stock data especially in Cushing, Oklahoma, the delivery point for U.S. crude futures traded on the New York Mercantile Exchange.
We find that these stock levels are not representing the global oil market.
On the demand side, the world economy might not be in such good shape as implied in the prices, Mezger said.
Supply is increasing from OPEC from November, he said. And we think there might be a second decision to increase output again and then the balance of the global oil market might be in a small surplus for the fourth quarter.