Oil Investors More Bullish After OPEC Supply-Cut Deal

Investors are the most optimistic on oil since the slump began two and a half years ago. Money managers boosted bets on rising West Texas Intermediate crude prices to the highest level since July 2014 after OPEC and producers outside the group agreed to coordinate crude production cuts.

Prices advanced to a 17-month high on Dec. 12 on speculation that the curbs will reduce the global inventory glut next year, Bloomberg reported.

"There’s been a full embrace of the OPEC, non-OPEC deal," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by telephone.

"They are being given the benefit of the doubt. The consensus is that supplies will tighten quickly and as a result investors are positioning for higher prices in the near term."

Hedge funds increased wagers on rising WTI by 2.5% in the week ended Dec. 13, US Commodity Futures Trading Commission data show, while shorts, or bets on lower prices, tumbled 30% to the lowest level since May.

OPEC agreed on Nov. 30 in Vienna to reduce output by 1.2 million barrels a day to 32.5 million for six months starting in January. On Dec. 10, the group was joined by other producers, including Russia and Kazakhstan, who pledged to trim supply by 558,000 barrels a day.

"Money managers have loaded up on the long side of the market," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by telephone. "They are looking for higher prices and therefore their fortunes are closely linked to the rate of compliance to these production cuts."

In the past, OPEC countries and their partners have often struggled to fully deliver on promised output cuts due to a reluctance to cede sales volumes and market share to competitors. Former Saudi Arabian oil minister Ali al-Naimi said on Dec. 2 that, in the history of OPEC agreements, “the unfortunate part is we tend to cheat.”

Oil stockpiles will decline by about 600,000 barrels a day in the next six months as curbs by OPEC and its partners take effect, the International Energy Agency said in a monthly report on Dec. 13. "If OPEC does not adhere closely to the production cuts and supply exceeds demand in the first half of 2017, these money managers won’t be happy," Evans said.