Speculators Win Betting on OPEC's Willingness to Extend Oil Glut

  • Hedge funds' net-long position dropped to five-year low: CFTC
  • OPEC effectively has no limit on crude production, Iran says

Oil Falls Below $40 as OPEC Extends Glut

Hedge funds wagered correctly that OPEC wouldn’t act to support oil prices.

QuickTake Oil Prices

The Organization of Petroleum Exporting Countries gave no respite from the global oil glut that has driven crude to a six-year low. At its Dec. 4 meeting in Vienna, the group set aside the daily output target it had breached for 18 straight months. Members will keep pumping about 31.5 million barrels a day, OPEC President Emmanuel Ibe Kachikwu said. Iran, which plans to boost supply when sanctions are lifted, said the group effectively has no limit on output.

“The bottom line is we’re looking for more of the same,” said Daniel Yergin, the Pulitzer Prize-winning oil historian and vice chairman of industry consultants IHS Inc. “This points to a weak market going ahead. We’re also waiting for Iran to increase output, adding to the overhang.”

Money managers’ net-long position in West Texas Intermediate crude fell 6 percent to a five-year low in the week ended Dec. 1, data from the U.S. Commodity Futures Trading Commission show. 

WTI fell 2.4 percent to $41.85 a barrel in the report week on the New York Mercantile Exchange. Prices tumbled 5.8 percent to $37.65 Monday in New York, the lowest close since February 2009.

Record Stockpiles

Saudi Arabia, the world’s largest crude exporter, has stuck to its position of the past year that any output cuts won’t work unless big producers outside OPEC, including Russia and Mexico, participate. Failure to reduce the global oversupply could push oil prices $20 lower next year, Venezuelan Oil Minister Eulogio Del Pino warned before the meeting.

“On the face of it, this is a disaster for OPEC,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund. “But if the Saudis manage to squeeze out the high-cost producers this may end up being a winning strategy.”

Record output this year from Saudi Arabia, Russia and Iraq has boosted global stockpiles to an all-time high, the International Energy Agency said on Nov. 13. U.S. crude supplies rose to 489.4 million in the week ended Nov. 27, the highest level for this time of year since 1930, Energy Information Administration data showed Dec. 2.

Speculators’ net-long position in WTI dropped by 5,758 contracts to 90,763 futures and options, the lowest since September 2010, CFTC data show. Shorts climbed by 7,812 contracts to the highest level since March, while longs increased by 2,054. 

Iran Output

Money managers also curbed their bullish stance in Brent crude in the week to Dec. 1, according to data from ICE Futures Europe on Monday. Traders reduced net-long positions in futures and options combined by 4.2 percent to 170,396 contracts.

In other markets, net bearish wagers on U.S. ultra low sulfur diesel decreased 8.3 percent to 41,587 contracts. Diesel futures slipped 2.2 percent in the period. Net bullish bets on Nymex gasoline climbed 65 percent to 25,060 contracts, as futures dropped 2 percent. 

Iran won’t accept any production curbs until it restores about 1 million barrels a day of output after the removal next year of international sanctions over its nuclear program, Iranian Oil Minister Bijan Namdar Zanganeh said after the OPEC decision. The country plans to boost supply by 500,000 barrels a day within weeks of the restrictions being lifted and by a total of 1 million months later, he said.

“This has set a weak fundamental tone for the next six months,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “There will be no cut in production to provide support for the market.”

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