Oil Bulls Rewarded as Crude Surges After OPEC Output AccordBy
Investors boosted bets on rising prices by most since January
Oil rallied most in five months after OPEC announced agreement
Oil investors’ bullish bets on last week’s OPEC meeting paid off.
While most analysts weren’t expecting a deal, money managers increased wagers on rising prices by the most since January ahead of the Organization of Petroleum Exporting Countries’ talks in Algiers. Oil capped the biggest monthly gain since April after the group announced Sept. 28 an agreement to limit production for the first time in eight years.
"There’s been a lot of skepticism," said Eric Nuttall, who manages a $130 million (C$171 million) energy fund at Sprott Asset Management LP in Toronto. "OPEC has changed since the last cycle. They’ve just gone through the worst selloff of oil in history. I’m more bullish than I was, and I was bullish before."
Investors increased their long position in West Texas Intermediate crude by 24,131 futures and options, or 8.1 percent, during the week ended Sept. 27, according to the Commodity Futures Trading Commission. Bets on falling prices dropped, after rising at the fastest pace in more than a year during the previous week.
WTI futures rose 2.8 percent to $44.67 a barrel in the report week before settling at $48.24 Sept. 30. Crude climbed 7.9 percent last month, the first September increase since 2010. Futures were 2 cents lower at $48.22 at 11:01 a.m. in New York on Monday.
OPEC surprised most analysts by agreeing on the framework for a deal to limit crude output as a supply surplus persists following a two-year price slump. Ministers said the group will keep production in a range of 32.5 to 33 million barrels a day. Earlier last month, Saudi Arabia signaled a decision was unlikely at the meeting, which would instead be a chance to consult.
"They did show they are going to defend prices," said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $133 billion of assets. "They don’t want to see market volatility below $40 and are willing to defend it."
OPEC pumped a record 33.69 million barrels a day in August, according to a Bloomberg survey, with Saudi Arabia increasing output to an all-time high. But it’s challenging for the group to follow through on the cuts -- and, historically, there’s been a "credibility problem," he said. While the deal could add as much as $10 a barrel to oil prices, Goldman Sachs Group Inc. said it’s unclear how the plan will be implemented.
Russian Finance Minister Anton Siluanov questioned the plan and said Sept. 30 the country will not revise its budget outlook, which is based on the assumption that oil will average $40 a barrel the next three years.
Citigroup Inc. analysts pointed to OPEC’s proposal to set up a committee for negotiating the division of cuts among members, noting that “this is still kicking the can down the road.” Iran and Nigeria have said they’re exempt from the deal, while Libya said prior to the meeting that it didn’t expect to be bound by an agreement.
The last attempt for an output accord collapsed in April when 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.
Despite the questions and caveats, the announcement reflects a notable shift, said Ed Morse, head of commodities research at Citigroup in New York.
"This is a big departure for the Saudis," he said.
In other markets, net-bullish bets on gasoline rose 5.7 percent to 23,089, while prices gained 2.1 percent during the report week. Net-bearish wagers on U.S. ultra low sulfur diesel increased 11 percent to 2,392 as futures rose 0.3 percent.
— With assistance by Mark Shenk