OPEC convinces investors that its oil output cuts are real
NEW YORK (Bloomberg) -- OPEC appears to have persuaded investors that it’s making good on promised production cuts.
Money managers are the most optimistic on West Texas Intermediate oil prices in at least a decade as the Organization of Petroleum Exporting Countries and other producers reduce crude output. Saudi Arabia has said more than 80% of the targeted reduction of 1.8 MMbopd has been implemented. Oil shipments from OPEC are plunging this month, according to tanker-tracker Petro-Logistics SA.
“All the signs are pointing to a pretty significant OPEC cut,” Mike Wittner, head of commodities research at Societe Generale SA in New York, said by telephone. “Until this week we were only getting data from the producers, now the tanker traffic seems to be supporting this view.”
OPEC will reduce supply by 900,000 bopd in January, the first month of the accord’s implementation, said the Geneva-based Petro-Logistics. That’s about 75% of the cut that the producer group agreed to make. Eleven non-members led by Russia are to curb their output in support.
Hedge funds boosted their net-long position, or the difference between bets on a price increase and wagers on a decline, by 6.1% in the week ended Jan. 24, U.S. Commodity Futures Trading Commission data show. WTI rose 1.3% to $53.18/bbl in the report week. The U.S. benchmark slipped 0.3% to $53.01 at 9:18 a.m. London time on Monday.
OPEC members Saudi Arabia, Kuwait and Algeria have said they’ve cut output this month by even more than was required, while Russia said it’s also curbing production faster than was agreed. Saudi Energy Minister Khalid Al-Falih said Jan. 22 that adherence has been so good that OPEC probably won’t need to extend the accord when it expires in the middle of the year.
Shale Headwind
The OPEC-engineered price rally has spurred a surge in drilling in the U.S. shale patch. Rigs targeting crude in the U.S. rose by 15 to 566 last week, the highest since November 2015, according to Baker Hughes.
“There’s one headwind in the oil market: increased U.S. shale production,” Jay Hatfield, a New York-based portfolio manager of the InfraCap MLP exchange-traded fund with $175 million in assets, said by telephone. “U.S. output in 2017 will be 1 MMbopd higher than last year.”
U.S. crude production climbed to 8.96 MMbpd in the week ended Jan. 20, the highest since April, according to the Energy Information Administration. That’s already closing in on the EIA’s latest 2017 output forecast of 9 MMbopd that was issued Jan. 10.
The net-long position in WTI rose by 21,429 futures and options to 370,939, the most in data going back to 2006. Longs rose 3.7% to a record high, while shorts slipped 11%.
“For the time being the market is more focused on the OPEC cuts than about how fast U.S. shale drillers are returning,” Wittner said. “There may come a point soon when the support provided by OPEC will be outweighed by the prospect of rising U.S. production. When that happens there will be a big shift in investor sentiment.”
