Oil prices soared to stratospheric levels following fears of a potential supply crunch after Russia’s invasion of Ukraine. Now, prices are coming back down to earth as big players like hedge funds are starting to trim their bets.

Hedge funds “slashed net-bullish Brent oil bets to their lowest levels on record,” noted Naeem Aslam, chief market analyst at AvaTrade. “The retreat demonstrates that significant swings in the oil market were part of a broad-based liquidation of positions, with speculators closing out long contracts in WTI, diesel, and gasoline futures.”

In the meantime, the Direxion Daily S&P Oil & Gas Exploration & Production Br 2X ETF (DRIP) has risen about 8% in the past five days. Inverse ETFs give bearish traders the ability to profit from a fall in oil prices in the convenience and liquidity of an ETF.

DRIP seeks daily investment results that equal 200% of the inverse of the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index, which is designed to measure the performance of a sub-industry or group of sub-industries determined based on the Global Industry Classification Standards (GICS).

DRIP Chart

Market Factors Affecting Oil Prices

The global landscape continues to change amid Russia’s invasion of Ukraine. Nations are looking to wean themselves off dependency on Russia for oil by looking to alternative sources of energy or working with other countries to shore up supply.

Meanwhile, the world will remain fixated on the news coming out of Ukraine. If the two nations can successfully move to negotiation, this could help ease the current oil supply shock.

Additionally, COVID cases are surging in China. This is causing supply chain disruptions that could also add to inflation worries.

“The downside correction in oil prices is sure a relief when it comes to the inflation expectations, but the new lockdown measures [in China] will continue worsening the supply chain crisis and add on the inflation worries,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank, in a note to clients.

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