Oil investors seem to have less reason to doubt that Organization of Petroleum Exporting Countries (Opec) and other producers will make the cuts needed to balance the market.
Money managers trimmed bets on falling West Texas Intermediate crude prices to the lowest level since August 2014 as Opec and other crude-exporters prepare to start curbing output in January.
Oil market volatility dropped to the lowest level in more than two years on Dec. 20 and futures settled at a 17-month high at a 17-month high on Friday.
“People are excited that Opec is going to hold firm and there will be a substantial reduction in inventories,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone. “The market should rebalance in 2017.”
Opec agreed to reduce its supplies by 1.2 million barrels a day, while 11 non-members including Russia and Kazakhstan pledged to curb output by almost 600,000 a day.
“The market is fulling embracing the Opec, non-Opec agreement,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “They are being given the benefit of the doubt now. The big test will come with the new year when we’ll see if they make the promised cuts.”
Confident Ministers
Oil prices are set to recover next year as Opec fulfills its output agreement, Saudi Arabia’s Energy Minister Khalid Al-Falih said in Riyadh on Dec. 22. Al-Falih’s outlook was echoed by comments made by his counterpart from the United Arab Emirates, Energy Minister Suhail Al Mazrouei, who also predicted the same day from Abu Dhabi that OPEC’s actions will result in higher prices in 2017.
Money managers’ short position in WTI dropped by 5,699 futures and options to 50,613, a fifth week of decreases. Longs, or bets the benchmark will rise, slipped 0.8 per cent. The resulting net-long position climbed 1 per cent to the highest level since since July 2014.
“This represents the market being in an overbought situation,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone. “They are very well prepared for a rise in prices, but are left vulnerable for any negative shocks.”
