The Carlyle Group's Chief Global Strategy Officer, Senior CSI Commodity Equity Index Analyst Jeff Currie, stated that after the 'arbitrage trade' shifted much-needed funds in the market, oil prices will face even greater risk of soaring.

Currie said that high interest rates will stimulate hedge funds and physical crude oil companies to cut up to $100 billion in futures positions and crude oil inventories and transfer them to the embrace of the US money market. However, he said that as the Fed lowers interest rates, crude oil will become more attractive and attract capital inflows. This reversal is similar to the closing of the yen's "arbitrage trading" that disrupted the stock market this month, and a severe interruption in crude oil supply could greatly amplify this trend.

In an interview, Currie said: "With the rate cut, the cost of holding these inventories will decrease, and we will see more inventories re-entering the crude oil market, both in terms of physical and financial aspects." "It should be seen that the dynamics that put pressure on prices are reversing. Under the same conditions, oil prices should rise."

Since approaching $90 per barrel in early July, international crude oil futures have fallen by nearly 9%, despite growing concerns among traders about deteriorating Chinese demand prospects, global crude oil inventories are still rapidly depleting. The global benchmark, $Brent Last Day Financial Futures(NOV4) (BZmain.US)$ The trading price fell 2% on Tuesday in London, close to $80 per barrel.

However, Currie said that the difference between the tightening fundamentals and the low prices is ultimately caused by arbitrage trading that attracts funds away from the commodities market. As a non-executive director of Energy Aspects Ltd., Currie first detailed this prospect in a report published by the consulting company.

Currie has led the commodity research at Goldman Sachs for nearly 30 years, known for bold and frequently bullish forecasts. Recently, as Wall Street's outlook for these commodities has become more dim, the firm will lower its expectations for Brent crude oil futures in 2025 to below $80 per barrel.

He estimates that the return on investment for crude oil needs to reach around 15% in order to compete with the safer 5.25% return in the USA money market. In the past two years, the USA money market has attracted $1.5 trillion of investment.

Interest rates and risk

With the shift in the Federal Reserve's posture, this situation may soon change. Federal Reserve Chairman Powell stated on Friday that the time has come to lower the key policy interest rate, confirming the expectation that officials will begin to lower borrowing costs next month.

As geopolitical tensions continue to threaten crude oil supply, neglect of the crude oil industry by investors also makes the industry vulnerable to disruptions.

The eastern government in Libya stated that it is currently contending for control of the central bank with the opposition based in Tripoli, and the struggle for control of the national oil wealth may trigger a new round of conflict, leading to the government shutting down crude oil production and exports. The El-Feel oil field in southwestern Libya has already ceased production, and the country's largest oil field has also stopped production.

Currie says that investors have been betting on a price drop, making them susceptible to the impact of price spikes. He said, 'The market changes too quickly. If something happens, and if they need to cover these short positions tomorrow, for example if the situation in Libya deteriorates, the unwinding of arbitrage trades could be massive.'

Editor / rocky