Opec cut throws wrench into record oil short sell­ing streak

Gulf Times Business - - BUSINESS -

Opec’s sur­prise out­put re­duc­tion has wrong-footed short-sellers. Hedge funds cut bets on ris­ing Brent crude prices to the low­est in more than three years in the week through Tues­day as short po­si­tions in­creased for a 10th straight time, the longest streak on record. Then on Fri­day, Opec and its al­lies sur­prised the oil mar­ket with a big­ger-thanex­pected cut, send­ing fu­tures surg­ing and leav­ing money man­agers pressed to un­wind their bear­ish wa­gers.

“Now that we’ve seen this fun­da­men­tal shift in the mar­ket, I would ex­pect there to be good sup­port down at these prices lev­els and lead those newly es­tab­lished shorts to start cov­er­ing,” said Ryan Fitz­mau­rice, an en­ergy strate­gist at Rabobank.

Af­ter much back-and-forth be­tween pro­duc­ers in Vienna, Opec and al­lies agreed to col­lec­tively cut pro­duc­tion by 1.2mn bpd, with the group shoul­der­ing 800,000 bpd. Saudi Ara­bia had pre­vi­ously said a 1mn bpd cut was the likely sce­nario. The agree­ment will be re­viewed in April.

Hedge funds’ net-long po­si­tion – the dif­fer­ence be­tween bets on higher Brent prices and wa­gers on a drop – de­clined 19% to 136,466 con­tracts, ICE Fu­tures Europe data show for the week ended De­cem­ber4. That’s the least bullish since Au­gust 2015. Longs slid 6.6%, while shorts jumped 14% to the high­est since July 2017.

Af­ter Opec’s an­nounce­ment, “peo­ple will start to be a lit­tle more com­fort­able de­ploy­ing net-length into the sec­tor,” said Chris Ket­ten­mann, chief en­ergy strate­gist at Macro Risk Ad­vi­sors LLC. “Opec has ba­si­cally said, we’ve got you, we’re go­ing to take down pro­duc­tion.”

Ahead of Opec’s deal, ob­servers were also fo­cus­ing on how tense the mar­ket has been. Im­plied volatil­ity for sec­ond-month West Texas In­ter­me­di­ate fu­tures hit a 2016-high late last month be­fore slowly creep­ing lower.

Volatil­ity at these lev­els is “un­ten­able for not only mar­ket par­tic­i­pants, but in­dus­try par­tic­i­pants need­ing to de­ploy capex into next year,” said Ket­ten­mann. “Opec is do­ing what they should do, manag­ing volatil­ity to at­tract cap­i­tal back to the sec­tor.”

But, some re­main scep­ti­cal that the deal is enough to make a dra­matic change in the oil mar­ket.

“A fair ques­tion the mar­ket has to ask now is, will this be enough?” said Rob Ha­worth, who helps over­see about $151bn at US Bank Wealth Man­age­ment in Seat­tle. “Are there enough signs that this $50$55 price range is low enough to limit the growth of US shale pro­duc­tion so 1.2mn bar­rels is enough, and will it be enough in the face of what we see as a slow­ing global eco­nomic en­vi­ron­ment?”

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