Oil Rally Fervor Cools as OPEC Output at Record Before Talks

  • Investors cut bets on oil rally by most in two years: CFTC
  • OPEC production reached 33.69 million barrels a day last month

Have Markets Priced in an Oil Production Freeze?

Investors are realizing that OPEC’s talk of a production freeze may not be much of a restraint, as output reached another record.

Ahead of informal talks to discuss a potential agreement with major exporters, OPEC’s crude output rose to a new high last month as members from Saudi Arabia to Kuwait boosted production. Money managers slashed bets on an oil rally by the most contracts in two years in the week ended Aug. 30, according to the Commodity Futures Trading Commission.

"There’s basically tension in the market," said Tim Evans, an energy analyst at Citi Futures Perspective in New York.

Supply from the Organization of Petroleum Exporting Countries rose by 120,000 barrels a day to 33.69 million in August, just as the group is set to hold discussions on an output deal in Algiers later this month, according to data compiled by Bloomberg. Meanwhile in the U.S., shale producers added a further 14 onshore oil and gas rigs last week, and have increased the total rig count by 93 since the end of May, according to Baker Hughes Inc. data.

Iran’s Role

A previous attempt to reach a deal among major producers collapsed in April after Saudi Arabia insisted on Iran’s participation. Iran is in the process of restoring exports after sanctions on its nuclear program were lifted in January. Russian President Vladimir Putin said in an interview that he’d like OPEC and Russia to reach an agreement to freeze output -- but with an exemption for Iran. A compromise is "the right decision for world energy," he said.

It’s unlikely the market is expecting much out of the freeze talks, said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. Even with an agreement, it would need to be honored and be effective in raising prices, he said.

In the U.S., onshore oil production is set to stop falling and even grow, according to a recent report by consulting firm Rystad Energy AS. New drilling activity in the sought-after Permian Basin will be enough to balance declines from other plays and “will restore the growth trend” in November and December this year, the report said.

Unwinding Bets

Speculators cut their long position in West Texas Intermediate, or bets prices will rise, by 25,364 futures and options in the week ended Aug. 30, according to the CFTC. That’s the biggest drop since July 2014. Net longs fell for the first time in four weeks, sliding 9.7 percent. Shorts, or wagers on a price decline, were reduced by 1,665 after a record 123,154 were undone in the previous two weeks.

WTI, the U.S. benchmark, fell 3.6 percent to $46.35 a barrel in the report week. Futures rose 3.9 percent to $46.17 at 10:03 a.m. London time on Monday.

In other markets, net-bullish bets on gasoline advanced 8.3 percent to 16,336 contracts. Gasoline futures declined 3.4 percent in the report week. Net-long wagers on U.S. ultra low sulfur diesel climbed 0.9 percent to 22,242 contracts. Futures fell 2 percent. 

As for U.S. crude supplies, while down from a peak in April, they’re at the highest seasonal level in at least three decades, according to data from the Energy Information Administration. Inventories rose by 2.28 million barrels in the week through Aug. 26, the fifth increase in six weeks.

The global glut may have eased but the market is still dealing with a surplus, Citi’s Evans said. The big question, he said, is whether OPEC can agree on a deal that "would change the path of their own production." And a freeze may not be enough.

"There’s risk there that it’s just too much to accomplish in one step," he said. "To go from no quotas whatsoever to effective limits on output is an awful lot."

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