Hedge Funds Are Giving OPEC Some Credit Again

Following four weeks of growing pessimism, bets on rising West Texas Intermediate prices jumped the most this year just as Saudi Arabia and Russia were mustering support for the deal they struck in Vienna last week, US Commodity Futures Trading Commission (CFTC) data show.

Hedge funds’ WTI net-long position -- the difference between bets on a price rise and wagers on a drop -- rose 20% in the week ended May 23, reaching 193,143 futures and options, according to the CFTC. The number had plunged 50% in the previous four weeks, Bloomberg reported.

As for fuels, pessimism over gasoline prices eased for a second week, with the net-short position on the New York-traded benchmark shrinking 79%, following a 38% contraction a week earlier, the CFTC data showed. Diesel bets moved to a net-long position of 10,846 contracts, from 4,053 net shorts.

When the Energy Information Administration reports on June 1 if US stockpiles shrank for another week, oil investors will have a chance to reassess if their frustration following the OPEC meeting was exaggerated.

What happens to US stockpiles will be key to sustaining the enthusiasm, and the Saudis know that. In addition to prolonging a historical deal with allies, the kingdom plans to reduce exports to the world’s biggest consumer.

“With OPEC now consciously trying to reduce flows into North America, it’s suggesting a faster than expected inventory unwind,” Bart Melek, a commodity strategist at Toronto Dominion Bank, said by phone. “There may be a bigger upside as we go into summer driving season.”

US inventories, one of the most watched indicators of the global supply glut, have remained above the five-year average that OPEC has sought to break as production from shale keeps rising. But they have fallen for seven straight weeks, and the decline is likely to continue as Americans take to the roads, boosting demand for fuel.

Markets were initially unimpressed by the May 25 deal between the Organization of Petroleum Exporting Countries and other top exporters to extend reduced output levels through March, without deeper cuts or any signals as to what happens later in 2018.

"Ahead of the OPEC meeting there was a lot of optimism they would get a deal done, and potentially even a bigger cut," said Phil Flynn, senior market analyst at Chicago-based Price Futures Group.