OPEC Wins Over Hedge Funds

Oil bulls charged into the new year with unprecedented vigor and the credit goes to OPEC.

The signs that the group is winning its tug of war with shale are compelling and money managers have taken note: Their combined bets on rising prices for West Texas Intermediate and Brent crude reached record levels in December, Bloomberg reported.

“At least through the first half of 2018, they’ll stay pretty bullish,” said Ashley Petersen, lead oil-market strategist at Stratas Advisors in New York. “June will be a real turning point because that’s when we’ll hear about unwinding the deal and if OPEC doesn’t handle it delicately, then there will be concern that the market will be flooded with oil again.”

The last week of the year saw futures trading above $60 a barrel in New York and $67 in London for the first time since mid-2015, after the two most important oil benchmarks surged more than 40% from their doldrums in June.

The rally came on the back of a well-orchestrated campaign led by Saudi Arabia and Russia to enforce and extend supply curbs implemented by the Organization of Petroleum Exporting Countries and other producing nations.

The effort culminated with a meeting in Vienna in November, where the group and its allies agreed to extend the cuts through the end of 2018. Meanwhile, US crude stockpiles have declined by about a fifth since peaking in March and approached the end of the year at their lowest level since October 2015.

While the threat of too much shale production next year still looms, producers ended the year on a more promising note. Under pressure from investors to focus on profits over growth, explorers have slowed down on drilling with the US rig count stalling in December.

The optimism was not so widespread earlier last year. Concern that OPEC’s efforts were not enough and would end abruptly in March 2018 led short-sellers to dominate the scene for several months, with WTI plunging to the low-$40s in June.

"It really wasn’t until the fourth quarter that we saw a resounding faith in the recovery," Stratas Advisors’ Petersen said.