Monday, November 7, 2016

Hedge Funds Are Turning Into OPEC Skeptics

Bets on higher WTI oil prices drop most in 2 years: CFTC; U.S. crude stockpiles rise record 14.4 million barrels: EIA

By Mark Shenk
November 7, 2016

Oil investors are growing more doubtful that OPEC can seal a deal.

Money managers reduced bets on higher oil prices by the most since July 2014 after the group failed to agree on country quotas in talks Oct. 28 in Vienna. The rally following the Organization of Petroleum Exporting Countries’ preliminary deal in late September has disappeared as questions mount about whether OPEC can implement the first supply cuts in eight years at its Nov. 30 summit.

“The market has gone from taking OPEC’s pledge at face value to questioning whether they will be able to come to any agreement at all,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York.

In addition to cutting long positions in West Texas Intermediate in the week ended Nov. 1, money managers increased their short positions, or wagers that prices will fall, Commodity Futures Trading Commission data show. The resulting net-long position decreased 13 percent.

WTI dropped 6.6 percent to $46.67 a barrel in the report week. The U.S. benchmark grade added 49 cents, or 1.1 percent, to $44.56 at 12:03 p.m. Singapore time on Monday.

Prices slipped below $44 a barrel on Nov. 4 after Reuters reported that Saudi Arabia threatened to raise output if other members didn’t agree to cuts. Losses eased after OPEC Secretary-General Mohammed Barkindo said the kingdom didn’t make the threat.

‘Significant Progress’

OPEC made “significant progress” during talks on Oct. 28, and again when they met the following day with representatives from non-members including Russia and Brazil, Barkindo said. It’s too early to say how much these other producers may be willing to cut, he added.

While Goldman Sachs Group Inc. sees little probability of a deal at a Nov. 30 meeting, Bank of America Merrill Lynch and Citigroup Inc. say an accord is likely. Saudi Arabia and Russia are “hungry for an agreement,” Ed Morse, head of commodity research at Citigroup, said Nov. 3 in a telephone interview.

But rising production will make it more difficult for oil exporters to fulfill the Algiers pact to curb output, Morse said. Output will need to be cut 1 million barrels a day because of higher supply from Libya and Nigeria.

Libya shipped the most oil in over a year during October, while Nigeria’s petroleum minister estimated on Nov. 1 that his country is now pumping more than 2 million barrels a day for the first time since the start of the year.

OPEC’s 14 members pumped a record 34.02 million barrels a day in October, according to Bloomberg estimates. Russia boosted oil output to a post Soviet record of 11.2 million barrels a day, according to the Energy Ministry’s CDU-TEK unit.

“The market’s also under pressure because of further increases in OPEC and Russia production,” Evans said. “If they agree to reduce production it will be from a very high level.”

Surging U.S. crude stockpiles added to the rout in prices. Inventories rose a record 14.4 million barrels in the week ended Oct. 28, Energy Information Administration data show.

Money managers’ long position in WTI dropped by 28,098 to 296,654 futures and options, the lowest level since July, the CFTC said. Shorts rose 11 percent.

In fuel markets, net-bullish bets on gasoline rose 2.8 percent to 41,859 contracts, the highest since March 2015, as futures slipped 1.1 percent in the report week. Wagers on higher ultra low sulfur diesel prices advanced 40 percent to 17,302, the highest since August. Futures declined 3 percent.

“I still think they can make a deal because they know the alternative of abject failure will have a significant price impact,” said Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts.

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