Investors Have Never Loved OPEC So Much as It Sticks to Cuts

EghtesadOnline: Investors are betting big that OPEC’s cuts are real. Money managers are the most bullish ever on West Texas Intermediate crude for a second week as signs show OPEC and other nations are slashing production.

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06 February 2017

The group cut supply by 840,000 barrels a day last month, according to a Bloomberg survey, and Russia, the largest of the non-members taking part in the deal, reduced output by 117,000 barrels a day. WTI has traded above $50 a barrel for the past seven weeks, encouraging Wall Street investors to fund more drilling in U.S. shale fields, Bloomberg reported.

“The smart money is starting to realize that the OPEC production cuts are real,” Phil Flynn, senior market analyst at Price Futures Group in Chicago, said by telephone on Friday. “The oil story is beginning to look like the bust-end of the cycle is over.”

Crude has risen 19 percent since the Organization of Petroleum Exporting Countries agreed in late November to cut output in an effort to reduce a global glut. With global demand growth outstripping supply gains elsewhere in the world, OPEC’s cuts may reduce stockpiles by as much as 2 million barrels a day this year, Andrew Hall, founder of hedge fund Astenbeck Capital Management LLC, said in an investor letter.

Hedge funds increased their net-long position, or the difference between bets on a price increase and wagers on a decline, by 2.4 percent to 379,927 in the week ended Jan. 31, the highest level in data going back to 2006, U.S. Commodity Futures Trading Commission data show. WTI slipped 0.7 percent to $52.81 a barrel during the report week. On Monday, prices were trading 0.3 percent higher at $54.01 a barrel as of 1:03 p.m. in Singapore.

January output reductions were led by Saudi Arabia, OPEC’s largest producer, which trimmed output by half a million barrels a day. Russia’s reduction was “more than twice as high as the initial plans of the companies,” Energy Minister Alexander Novak said.

A possible U.S. border tax in some form may also provide a boost to prices and drilling. The potential tax may lead to WTI rising 25 percent, said Ebele Kemery, portfolio manager and head of energy investing at JPMorgan Asset Management.

U.S. Inventories

Still, OPEC’s total output remains 550,000 barrels a day above the target set out in their deal. U.S. crude inventories keep growing, as Energy Information Administration data showed stockpiles rose to the highest level since August. Hall said that the OPEC cuts won’t be reflected in U.S. inventories until this month, because of a surge of Middle East supply before the deal, and the time it takes for tankers to reach the U.S.

The rally has encouraged U.S. shale producers to grow faster, which may help keep prices capped around $55 a barrel as companies hedge their output. Producers and merchants increased their short positions, or bets on falling prices, to 703,259 contracts, CFTC data show. Diamondback Energy Inc. plans to double its capital spending this year and Continental Resources Inc. will spend 77 percent more.

Wall Street is eager to join in. Energy companies in the U.S. raised $6.64 billion from equity sales in January, the biggest haul for the beginning of a year since at least 2000, data compiled by Bloomberg show. Drillers have increased the number of rigs seeking oil by 84 percent since May, according to Baker Hughes Inc.

The market is “closely monitoring the compliance of the countries involved with the OPEC, non-OPEC production deal,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by telephone on Friday. “Early signs have been somewhat decent, so the market continues to reward their efforts. The positioning is a bit extreme. It could be a cautionary tale that the run may be nearing its end at the same time.”