Too Much Ain’t Enough as Investors Bet on Oil Market Rebound

  • WTI net-long position rises to highest since June 2014: CFTC
  • OPEC, non-OPEC agree to trim almost 1.8 million b/d this year

Oil Producers Agree on Way to Monitor Oil Cut

Hedge funds are showing they have some faith in OPEC.  

Their bets on rising West Texas Intermediate crude prices reached the highest since June 2014 as the Organization of Petroleum Exporting Countries and other producers reduce output to balance the market. Saudi Arabia, Algeria and Kuwait have already made deeper cuts than required, while Russia has been able to reduce supply faster than expected, ministers from the countries said over the weekend in Vienna as they gathered for the first meeting to monitor adherence to their output-cut accord.

Funds increased their net-long position, or the difference between wagers on a price increase and bets on a decline, by 14 percent in the week ended Jan. 17, U.S. Commodity Futures Trading Commission data show. WTI advanced 3.3 percent to $52.48 a barrel in the report week. March futures lost 30 cents to $52.92 a barrel at 9:47 a.m. London time.

"Money mangers are buying oil, as they say in Texas, like too much ain’t enough," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone. "They are trading based on confidence that OPEC and non-OPEC producers will reduce output enough to send prices higher."

WTI climbed to an 18-month high after OPEC and 11 non-members agreed on Dec. 10 to end two years of unfettered production. Prices have dropped about 3 percent from the highs as traders await evidence that the cuts are being adhered to.

OPEC’s production fell by 220,900 barrels a day to 33.085 million a day in December, according to secondary sources data in the group’s monthly report published Jan. 18. The declines still leave output about 1.8 million barrels a day higher than the average of 31.3 million the group is targeting in the first half of the year, underscoring a need to press on with cuts.

Strong Compliance

The first two weeks of January saw “very strong” compliance and the majority of producers are already exceeding their pledged cuts, Saudi Arabia’s Minister of Energy and Industry Khalid Al-Falih said at the World Economic Forum in Davos, Switzerland, on Thursday. About 1.5 million barrels a day of output has been withdrawn from the market, he told Al Arabiya television on Friday, reiterating the number to reporters in Vienna.

Kuwaiti Oil Minister Essam Al-Marzouk, who chairs the supply-cut monitoring committee, emerged smiling from the meeting in Vienna with a message of success: the producers were in “total agreement” on the monitoring mechanism and wouldn’t accept anything less than 100 percent compliance with the cuts. They intended to prove OPEC is serious about eliminating a global glut and dispel skepticism stemming from previous unfulfilled promises.

"This market has a bullish cast," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. "There’s a lot of commentary out there that points to a tightening market,"

Money managers’ net-long position in WTI rose by 43,601 futures and options to 349,510. Longs rose 14 percent to a record 406,723, while shorts climbed 11 percent.

In fuel markets, net-bullish bets on gasoline rose 0.4 percent to 63,678 contracts, the highest since July 2014, as futures advanced 3.5 percent in the report week. Money managers increased net-bullish wagers on ultra low sulfur diesel by 6.3 percent to 34,539 contracts as futures climbed 2.3 percent. 

Hedging Profits

Producers are erring on the side of caution. U.S. oil companies are using the rally to hedge their price risk for the next two years. Producers’ short positions, protecting against a drop in prices, increased to 677,479 contracts, the most since 2007.

Drillers added 29 oil rigs in the U.S. last week, the biggest gain since April 2013, Baker Hughes data show. The U.S. raised its domestic output forecast for 2017 to 9 million barrels a day from 8.78 million projected in December, according to the Energy Information Administration’s monthly Short-Term Energy Outlook released Tuesday.

"This is exactly what we saw before prices fell off a cliff in 2014, with managed money length at a record," Kilduff said. "Producers are locking in cash flows now. They’re profitable at this level and want protection in case prices crash again."

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE