OPEC out­put cut sur­prises oil short-sell­ers

Houston Chronicle - - MARKET SUMMARY - By Jes­sica Sum­mers

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-than-ex­pected 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-and­forth be­tween pro­duc­ers in Vienna, OPEC and al­lies agreed to col­lec­tively cut pro­duc­tion by 1.2 mil­lion bar­rels a day, with the car­tel shoul­der­ing 800,000 bar­rels a day. Saudi Ara­bia had pre­vi­ously said a 1 mil­lion bar­rel-a-day 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 per­cent to 136,466 con­tracts, ICE Fu­tures Europe data show for the week ended Dec 4. That’s the least bullish since Au­gust 2015. Longs slid 6.6 per­cent, while shorts jumped 14 per­cent 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 skep­ti­cal 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 $151 bil­lion at U.S. Bank Wealth Man­age­ment in Seat­tle. Are there enough signs that this $50-$55 price range is low enough to limit the growth of U.S. shale pro­duc­tion so 1.2 mil­lion bar­rels is enough, and will it be enough in the face of what we see as a slow­ing global eco­nomic en­vi­ron­ment?”

The weekly re­port from the U.S. Com­mod­ity Fu­tures Trad­ing Com­mis­sion on WTI wa­gers will be de­layed un­til Mon­day, fol­low­ing a day of mourn­ing ear­lier this week for for­mer Pres­i­dent Ge­orge H.W. Bush.

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