In a move officially intended to support “the stability of the oil market”, the latest production cuts from OPEC+ caught the market by surprise and threw the short sellers under the bus.
Amid the oil price selloffs following the banking sector jitters last month, top OPEC+ officials spent weeks reassuring market participants that the plunge in oil didn’t warrant any tweaks to the production cuts agreement. Until they decided it did.
A day before a regularly scheduled OPEC+ panel meeting, the biggest OPEC producers in the Middle East and several other members of the OPEC+ pact announced on a Sunday a total of 1.16 million bpd of fresh production cuts. The reduction is on top of Russia’s current 500,000 bpd cut, which was extended until the end of the year.
Saudi Arabia will cut 500,000 bpd and said that the move was “a precautionary measure aimed at supporting the stability of the oil market.”
The announcement came when markets were closed, and OPEC+ has undoubtedly bet on a jump in oil prices the moment the markets opened. Oil soared by $6 per barrel on the Monday following the announcement, the biggest single-day surge in prices in over a year.
Apart from looking to put an $80 floor under Brent Crude prices, the alliance followed through the proverbial promise of Saudi Energy Minister Prince Abdulaziz bin Salman from 2020, “I’m going to make sure whoever gambles on this market will be ouching like hell.”
The most recent data from exchanges showed a massive short covering and a renewed buying spree in oil futures in the two days after OPEC+ said it would keep another more than 1 million bpd off the market for the rest of the year.
Money managers bought the equivalent of 128 million barrels in the six most important petroleum futures and options contracts in the week to April 4, with buying heavily concentrated on the crude oil futures Brent and WTI, according to data from exchanges compiled by Reuters market analyst John Kemp.
The short positions in Brent were slashed by a massive 46% in the week to April 4, the steepest weekly drop in bearish bets in data going back to 2011, per Bloomberg’s estimates.
With the announcement of additional cuts, OPEC+ recalibrated the hedge fund positioning to the levels from late January, before the recession and banking sector fears which pushed oil prices down below $80 a barrel to the lowest level in 15 months.
A combination of fresh longs and short covering boosted the net long position – the difference between bullish and bearish bets – in both crude oil contracts.
The surprise OPEC+ production cut triggered the biggest buying spree of WTI and Brent crude oil futures since December 2016, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Tuesday, commenting on the Commitment of Traders report for the week to April 4.
Hedge funds and other money managers “were forced back on the buy side after OPEC+ jolted the markets with a surprise production cut,” Hansen said.
“In the week to April 4, and especially last Monday April 3, hedge funds turned aggressive buyers thereby boosting their net long by the biggest amount since November 2016.”
Brent buying – with 29,000 contracts of short covering added to 44,000 contracts of fresh longs – was the second highest weekly addition of length on record, while the rise in the net long in WTI was mostly due to short covering, Hansen noted.
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However, the market could be at risk of a correction, considering the fact that oil has traded within a very tight range and there hasn’t been follow-through buying since the April 3 surge in prices, he said.
Amid lower-than-usual trading volumes due to the Easter holidays in recent days, the market now awaits news about demand outlooks.
By Tsvetana Paraskova for Oilprice.com
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