Renewed conflict between the US and Iran prompts hedge funds to aggressively increase oil positions, at the fastest pace in ten years.

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The escalating U.S.-Iran conflict is profoundly reshaping the global crude oil market landscape. Hedge funds are betting on Brent crude oil rising at the fastest pace in nearly a decade, as disruptions to the Strait of Hormuz and tightening fuel supplies are driving up both oil prices and refining margins.

According to Bloomberg, for the week ending July 14, asset management institutions increased net long positions in Brent crude oil by 75,996 contracts to 357,154 contracts, marking the biggest weekly increase since December 2016. Overall positions rebounded sharply from a seven-month low hit the week before. Meanwhile, crude oil prices have soared to about a one-month high in the past ten days, after posting a cumulative decline of about 30% in the second quarter.

The direct trigger for this round of position increases is the U.S. resuming military strikes against Iran. Iran immediately retaliated against Gulf neighbors and launched maritime attacks on ships passing through the Strait of Hormuz, severely restricting transit through this crucial chokepoint. Investor sentiment reversed dramatically within just one week—from concerns over excess supply to a rush to close short positions.

Rapid Position Reversal, Longs Return to the Market

The scale of this round of hedge fund position increases is historically rare. According to Bloomberg citing ICE European Futures weekly futures and options data, the weekly increase in Brent crude oil long positions was the highest since December 2016, pulling total holdings back from a seven-month low.

This shift reflects the intense volatility in market sentiment. Just a week ago, investors were worried about a potential supply glut; with the U.S. resuming strikes on Iran, the market quickly turned, short covering became the dominant force, rapidly accumulating long positions.

Hormuz Disrupted, Fuel Profits Hit Record Highs

The impact of the conflict on global fuel markets is equally significant. Iran’s attacks on ships passing through the Strait of Hormuz have sharply reduced transit volume over the past ten days, tightening global supplies of refined products such as diesel and gasoline, pushing global refiners' profit margins to historic highs.

According to Bloomberg data, capital simultaneously increased net long positions in NYMEX heating oil by 1,868 contracts, total positions rising to 36,451 contracts—the highest level since the outbreak of war with Iran in March this year. The weekly increase in NYMEX diesel net long positions was also the largest since before the outbreak of war in February.

Russian Exports Plunge, Supply Pressure Intensifies

The tightness in the fuel market is not solely due to Middle East tensions. According to Bloomberg, months of Ukrainian strikes on Russian refineries have led to a sharp drop in Russia’s refined product exports, prompting Moscow to announce a ban on diesel exports, further intensifying global fuel supply tightness.

The combined impact of these two supply shocks is putting exceptional pressure on the global diesel market, also helping explain why refining margins can reach historic highs in a short period and why capital continues to flow into related long positions.

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