Investor honeymoon with Opec output cut falters

new york — There are limits to investors’ love affair with the Opec.

After unprecedented optimism that the Organisation of Petroleum Exporting Countries will manage to ease a global supply glut, money managers reduced their bets on rising West Texas Intermediate prices for the first time in a month. While the group and other major exporters are pumping less crude, US inventories and production are on the rise, and shale drillers keep adding rigs.

The US benchmark has traded mostly between $50 and $55 a barrel for the last two months.

“There’s starting to be fatigue about the range we’ve been trading in,” John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy, said. “It won’t be summer until we break out to the upside.”

The Opec achieved the best compliance rate in its history at the outset of its accord to cut production, a plan that’s being supported by strong demand, the International Energy Agency said in a February 10 report.

Meanwhile, US producers last week extended the biggest surge in oil drilling in more than four years as the prolific shale plays of Texas and Oklahoma lure investment from Exxon Mobil and Continental Resources.

US crude output climbed to 8.98 million barrels a day in the week ended February 3, according to the Energy Information Administration. That’s an increase of about half a million barrels a day from last year’s low, and the agency expects production to keep climbing to reach 9.53 million a day next year, the most since 1970. Hedge funds cut their net-long position, or the difference between bets on a price increase and wagers on a decline, by 5.4 per cent in the week ended February 7, US Commodity Futures Trading Commission (CFTC) data show. WTI slipped 1.2 per cent to $52.17 a barrel in the report week, and closed at $53.86 on February 10. It was trading at $53.80 a barrel, down 6 cents, on Monday at 1.04pm in Hong Kong.

Money managers’ net-long position in WTI decreased by 20,540 futures and options to 359,387. Longs fell 1.8 per cent, while shorts climbed 26 per cent, the biggest gain in three months.

“The shorts increased, which shows that there are investors willing to bet that the Opec production cuts are fully priced into the market and that the oil bulls are vulnerable to bearish news,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said.

As they boost output, US oil producers are hedging their price risk for this year and 2018. Producers’ short positions, protecting against a drop in prices, increased to 707,498 futures and options, the most since August 2007, according to the CFTC. — Bloomberg