While hedge fund activity in commodities is contributing to the surge of oil to record highs, long-term, fundamental supply constraints are the main culprit.

"In the short-term, you have hedge fund flows affecting prices," Bob Greer, executive vice president at PIMCO, told Reuters. "They are increasing the volatility of the markets."

Hedge funds have been drawn to commodities due to their lack of correlation to stocks, bonds and mutual funds.

Greer said about $200 billion is tracking long-only commodity indexes, in addition to an unknown amount of hedge fund money long and short.

Some hedge funds are more focused on trading strategies than the physical oil supply and demand, he said, and “tend to operate in the futures trading world rather than the real world where physical commodities are traded.”

He said some funds have been trading in oil’s relationship to the U.S. dollar, but ultimately the supply and demand fundamentals of a commodity will determine the price level.

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