Net long bets on WTI and Brent hit over 1 billion barrels last week. Speculators are apparently falling over themselves to pour money into these two futures. And prices are reacting as they usually do when large amounts of money are betting on these two contracts or pulling out of them. Is this good news for producers, though?
According to some authors, such as Bloomberg Gadfly’s Liam Denning, it’s pretty good news for U.S. shale drillers, who are hedging their production at higher prices, and it should be good news for OPEC and Russia as well. OPEC has a habit of complaining about speculators’ clout on the oil market, but now, Denning argues, the cartel should be grateful to the money managers for supporting prices.
They should be grateful not just because Brent is now hovering around US$70 a barrel, but also because near-dated contracts are now more expensive than longer-dated ones, and OPEC sells most of its crude on the spot market.
Yet, as Oilprice wrote earlier this week, there are those who don’t believe the current level of oil prices is something that OPEC is happy about. Prices, analysts argue, have soared too high for OPEC’s comfort, and now the cartel may be looking for ways to “talk the price down,” as Citi’s Ed Morse told Bloomberg. In other words, OPEC has no reason to be grateful to speculators about their record-high number of long positions. On the contrary, it has a reason to be angry at them. Related: The Least Compliant Country In The OPEC Deal
But, some observers of events on the oil market note, why would OPEC, or rather Saudi Arabia, want to talk prices down ahead of Aramco’s IPO? It doesn’t make sense to actively try and push prices down when Riyadh is going all in on a massive economic reform program that will be funded with the proceeds from the IPO.
Arguments will doubtless continue to fly back and forth until at least June when OPEC and Russia will meet to discuss the progress of the cut deal and the next steps. It’s unlikely we’ll see either of the above views prevail over the other before then, but there is something else that could happen, sooner rather than later, that would affect prices and either help OPEC in its perceived attempts to rein in the rally or disappoint it in its quest for ever-higher prices, depending on the perspective.
This something is a selloff. Reuters’ John Kemp earlier this week warned that bullish bets on the six leading oil and oil product futures and options had hit 1.4 billion barrels in the week to January 9. Kemp noted that this is higher than any other on record, exceeding by a wide margin “anything seen even during the spike in oil prices during late 2007 and the first half of 2008.”
This level of bullish bets is unsustainable over any longer stretch of time, that much is clear. Either profit-taking or a scare that prices are about to start falling soon for whatever reason will trigger a selloff. The most likely reason for the scare would be rising U.S. production. Prices already reacted negatively to EIA’s latest weekly report that revealed U.S. oil production had grown to 9.75 million barrels. A selloff could be around the corner.
By Irina Slav for Oilprice.com
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Much of US 'wildcatters' oil production is heged so they are not about to slow down.