The annual five-day rebalancing of portfolios beginning on Friday could attract as much as US$9 billion buying into crude oil contracts, putting upward pressure on oil prices, investment banks and analysts tell Bloomberg.
The rebalancing of indices to adjust the weighting of assets in portfolios is being done every year so that target allocations or risk levels are restored. However, the rebalancing this year could attract more than usual buyers into crude oil contracts because of the 20-percent decline of oil prices during 2020.
According to estimates from Citigroup, the next five days could see a buying spree in oil futures that could be as high as US$9 billion to adjust the weighting of the major commodity-linked indices.
The market will likely see long positions into another 80 to 100 million barrels equivalent of oil futures contracts, which could drive oil prices by $2-$3 a barrel, Gary Ross, chief executive at Black Gold Investors LLC, told Bloomberg.
It’s not a given that the market will see US$9 billion of new buying into oil futures because some investors and traders may have already done it ahead of the rebalancing period, according to Bloomberg.
Even if the buying spree is not so high, the rebalancing will likely to continue to support oil prices.
“This buying pressure across the complex should serve as a tailwind and help fortify the improving oil market sentiment,” Helima Croft and Michael Tran, analysts at RBC Capital Markets, say in a note carried by Bloomberg.
The upward pressure on oil is set to build on the rally at the start of 2021 following the OPEC+ decision to hold off on another 500,000 bpd increase in production from February and the surprise announcement from Saudi Arabia, which unilaterally pledged to cut an additional 1 million bpd from its production in February and March. WTI Crude prices topped $50 a barrel on Tuesday, for the first time since the end of February 2020.