Hedge funds bet oil rally to extend into 2017 as output cuts hit

HOUSTON (Bloomberg) -- Investors are showing no sign of turning their backs on oil heading into 2017.

Money managers’ wagers on rising West Texas Intermediate crude prices are triple what they were at the end of 2015, and are the highest since the start of the crude market crash 2 1/2 years ago. Crude futures settled at the highest in almost 18 months on Dec. 28, with investors now eyeing the Organization of Petroleum Exporting Countries and other producers to see who complies with agreed output cuts.

Hedge funds boosted their net-long position, or the difference between bets on a price increase and wagers on a decline, by 0.6% in the week ended Dec. 27, U.S. Commodity Futures Trading Commission data show. WTI  increased 3.2% to $53.90/bbl in the report week before settling at $53.72 in New York on Friday.

"We have a very confident positioning here," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said Friday in a phone interview. "There’s plenty of hope that prices are supported and move higher and very little fear that compliance will be poor and prices will drop."

OPEC agreed to reduce its supplies by 1.2 MMbpd, while 11 non-members, including Russia and Kazakhstan, pledged to curb output by almost 600,000 bbl.

Prices climbed this week amid signs that OPEC members will follow through with the promised cuts. Iraqi Oil Minister Jabbar al-Luaibi said his country was committed to cutting output by 200,000 to 210,000 bpd from the beginning of next month, Kuwait’s state-run news agency KUNA reported Thursday. Venezuela will cut 95,000 bpd of production starting Jan. 1, the country’s oil ministry said in a statement posted Tuesday.

The net-long position in WTI rose by 1,753 futures and options to 307,909. It was the seventh week of increases, the longest stretch since March 2014.

In fuel markets, net-bullish bets on gasoline rose 17% to 50,091 contracts, the highest since February 2015, as futures advanced 3.7% in the report week. Money managers increased wagers on higher ultra low sulfur diesel prices by 22% to 33,541 contracts, the highest since July 2014, as futures advanced 1.8%.

U.S. oil companies had been using the rally to hedge their price risk for the next two years, potentially boosting output next year. Producers’ short positions, protecting against a drop in prices, decreased to 614,449 contracts. The number of bearish wagers had climbed to the highest since August 2007 in the week ended Dec. 13.

"What a difference a year makes," Phil Flynn, senior market analyst at Price Futures Group in Chicago, said Friday in a phone interview. After doom-and-gloom sentiment closed out 2015, the market is now "probably the most optimistic we are looking going into a new year in energy in many, many years," he said.