As OPEC Sticks to Promised Cuts, Investors Shower their Love to the Cartel

Positive betting that OPEC’s cuts are real are being put by investors.

As signs show OPEC and other nations are slashing production, money managers are the most bullish ever on West Texas Intermediate crude for a second week. Russia, the largest of the non-members taking part in the deal, reduced output by 117,000 barrels a day and the group cut supply by 840,000 barrels a day last month. Encouraging Wall Street investors to fund more drilling in U.S. shale fields, WTI has traded above $50 a barrel for the past seven weeks.

“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. “The oil story is beginning to look like the bust-end of the cycle is over.”

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

U.S. Commodity Futures Trading Commission data show that highest level in data going back to 2006 was achieved in net-long position by hedge funds as it increased by 2.4 percent to 379,927 in the week ended Jan. 31. Net-long position is the difference between bets on a price increase and wagers on a decline.

Saudi Arabia, OPEC’s largest producer, which trimmed output by half a million barrels a day, led the January output reductions. Russia’s Energy Minister Alexander Novak said that its reduction was “more than twice as high as the initial plans of the companies.” Boost to prices and drilling could be provided by a possible U.S. border tax in some form. Ebele Kemery, portfolio manager and head of energy investing at JPMorgan Asset Management said the potential tax may lead to WTI rising 25 percent.

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

As companies hedge their output, U.S. shale producers have been encouraged to grow faster by the rally, which may help keep prices capped around $55 a barrel.

Data shows that the biggest haul for the beginning of a year since at least 2000 was made by energy companies in the U.S. which raised $6.64 billion from equity sales in January. According to Baker Hughes Inc, since May, drillers have increased the number of rigs seeking oil by 84 percent.

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. “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.”

(Adapted from Bloomberg)

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