Hedge Funds Boost Oil Positions: Is a Major Rally on the Horizon?

Key Points

• Hedge funds are boosting their oil positions at the fastest pace all year. Now, investors can understand some of the reasoning behind these decisions.
• Looking into a way to tap into this upside, investors can choose from two ETFs or two high-upside stocks.
• Wall Street analysts, institutional capital, and even bearish traders agree this could be bullish.

Whenever retail investors can get their hands on the latest set of investment flow data, they should pay attention to it. Not only to figure out who is buying what and what asset classes – or individual stocks – might come into favor in the following months but actually so that they can connect the dots with whatever trends and themes are developing in the broader markets and economy.

This way, instead of blindly following a hedge fund manager or a mega investor, there is a chance to know more in-depth reasons why something might be a buy or a sell, which is especially important when considering exiting a position. That is why today’s hedge fund buying activity in the energy sector, particularly for oil, is important to keep in mind not by itself but by connecting this buying preference to the price action in other markets as a whole.

To keep track of the overall sector, apart from oil prices, investors can look at the broader Energy Select Sector SPDR Fund NYSEARCA: XLE; this way, they can have a gauge of oil stocks and what the sentiment shifts might be. To follow oil to the letter, that’s where the United States Oil Fund LP NYSEARCA: USO also comes into play. However, for those looking for a specific upside in the value chain, names like Occidental Petroleum Co. NYSE: OXY and Hess Co. NYSE: HES are ones to think about.

What Hedge Funds Noticed From ETF Price Action

Markets today are as interconnected as ever, and the days of individual price action are long gone. This means that more and more hedge funds not involved in quantum computing or artificial intelligence are focusing on trading correlation regimes by connecting the dots to different themes.

What this means is that, for example, as bond prices fall and their yields go up, there is now a positive correlation to oil prices on the downside. That shouldn’t be the case, as higher yields typically signal higher inflation expectations, which should, in theory, be good for oil prices.

Well, these hedge funds don’t just rely on theory; they’ve bought in practice. According to this Bloomberg report, hedge funds boosted their WTI positions to 161,201 lots, meaning that they are starting to acquire net long futures inventory today.

Even producers like Hess and Occidental are doing so, as shown in the commitment of traders report. Merchants want to buy oil today to protect themselves against a surge in prices, which might eat into their profits if they can’t refine and deliver the raw material quickly enough.

This is why Warren Buffett has recently bought up to 29% of Occidental and why Wall Street analysts have a consensus price target of $62.1 a share on the company, calling for a net upside of 29.2% from where it trades today. More than that, those at Mizuho were willing to stand out from the pack.

As of December 2024, these analysts valued Occidental Petroleum stock at $70, implying an even larger rally of 45.5% from today’s levels.

More Ways to Tap Into Upside

Occidental Petroleum is one way to pay the new value run that will come into oil stocks, but it’s not the only one. Hess has gotten bearish traders to back off a bit from shorting the stock over the past month, a trend investors can see through the 9.6% decline in the company’s short interest.

More than this sign of bearish capitulation, investors can look at the new December 2024 ratings on Hess stock from Wells Fargo analysts.

With an overweight rating now, valuations are expected to fall closer to $193 a share for Hess stock, which would mean a net upside of as much as 47.8% from today’s stock price.

With this in mind, investors shouldn’t be surprised to see those from FFG Partners boost their holdings in the United States Oil fund by up to 2.2% as of December 2024, bringing their net position to a high of $5.3 million today.

The same can be said for Hamilton Capital's 5.7% boost in the broader energy ETF as of November 2024, which now holds a $297.5 million stake. All told, these hedge funds and merchants have made the right decision by accumulating oil positions ahead of a potential rotation from bonds.

This is a thesis that retail investors can adopt today and understand that when the same relationship with bonds flips, it is likely time to exit and take their profits home.