Renewed Inflation Worries Drive Oil Price Rally

LONDON (Reuters) – Investors are increasingly purchasing crude oil futures as a safeguard against the potential resurgence of global inflation, driven by U.S. President Donald Trump’s threatened trade tariffs. This move has added momentum to the recent rally in oil prices, which was initially sparked by tightened sanctions on Russia.

Oil serves as a popular inflation hedge due to its significant role in Consumer Price Index (CPI) baskets and its indirect influence on goods and services costs. However, the widespread adoption of this strategy could itself contribute to higher consumer prices. Fund managers have built up the largest net long position in crude oil futures in nine months, according to data from the Commodity Futures Trading Commission.

“This is the best hedge at the moment…if inflation in the U.S. proves to be more resistant,” said Francesco Sandrini, head of multi-asset strategies at Amundi, Europe’s largest asset manager overseeing 2.2 trillion euros ($2.29 trillion). Amundi is increasing its commodities holdings, buying oil and metals, he said.

Despite U.S. stock markets facing pressure at the beginning of the year and benchmark Treasury yields hitting 15-month highs, oil prices have risen around 5% for Brent crude and 4% for U.S. WTI futures so far this year. This increase has been driven by both a tightening of supply from fresh sanctions on Russia’s energy industry and investor concerns over potential inflation if Trump proceeds with tariffs on countries like Mexico, Canada, and China.

According to Goldman Sachs, energy has historically provided the strongest inflation-adjusted returns when consumer prices rise faster than expected. Energy forms 6.4% of the U.S. consumer price index (CPI) and 9.9% of the euro zone equivalent, according to the U.S. Bureau of Labor Statistics and Eurostat respectively.

Recent economic data, such as the U.S. jobs report, has fanned inflation fears, with a January University of Michigan survey showing an uptick in consumers’ price expectations over both the short- and medium-term. “With strong growth combined with sticky inflation, markets are now expecting the Fed to be more cautious. Higher oil prices also don’t bode well for the inflation outlook,” said Shaniel Ramjee, co-head of multi-asset at Pictet Asset Management in London.

As stocks and bonds fell in tandem, demand rose for investments considered less likely to lose value simultaneously. “Commodities are a good diversifier, up to a point,” said John Roe, head of multi-asset at Legal & General Investment Management. “But if the inflation scares lead to growth concerns, then suddenly they can get caught up in it,” he added, noting the impact on demand.

The oil market rally has also attracted momentum trading funds, according to Saxo Bank’s analysis, while commodity trading advisors (CTAs), which typically trade on technical signals and had largely been betting on a fall in crude prices, were flipping their positions, helping to further boost prices.