Investors Banking Big on Global Oil Supply Cuts

Money managers are the most bullish ever on West Texas Intermediate crude for a second week as signs show OPEC and other nations are slashing production. 

The group cut supply by 840,000 barrels a day last month, according to a Bloomberg survey, and Russia, the largest of the non-members taking part in the deal, reduced output by 117,000 barrels a day, Bloomberg reported.

WTI has traded above $50 a barrel for the past seven weeks, encouraging Wall Street investors to fund more drilling in US shale fields.

“The smart money is starting to realize that the OPEC production cuts are real,” Phil Flynn, senior market analyst at Price Futures Group in Chicago, said. “The oil story is beginning to look like the bust-end of the cycle is over.”

Crude has risen 19% since the Organization of Petroleum Exporting Countries agreed in late November to cut output in an effort to reduce a global glut. 

With global demand growth outstripping supply gains elsewhere in the world, OPEC cuts may reduce stockpiles by as much as 2 million barrels a day this year, Andrew Hall, founder of hedge fund Astenbeck Capital Management LLC, said in an investor letter.

Hedge funds increased their net-long position, or the difference between bets on a price increase and wagers on a decline, by 2.4% to 379,927 in the week ended Jan. 31, the highest level in data going back to 2006, US Commodity Futures Trading Commission data show.

January output reductions were led by Saudi Arabia, OPEC’s largest producer, which trimmed output by half a million barrels a day. Russia’s reduction was “more than twice as high as the initial plans of the companies,” Energy Minister Alexander Novak said.

The oil price rally has encouraged US shale producers to grow faster, which may help keep prices capped around $55 a barrel as companies hedge their output. 

US Drillers have increased the number of active rigs by 84% since May, according to Baker Hughes Inc.