Investors have become the most bullish on oil prices since the collapse began more than two years ago, betting that the OPEC deal will tighten the oil market, resulting in higher prices in the weeks ahead.
"There’s been a full embrace of the OPEC, non-OPEC deal," John Kilduff, a partner at Again Capital LLC, told Bloomberg in an interview. "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."
The trends in long and short bets on WTI have been like a roller-coaster this year, surging and crashing depending on shifts in oil market sentiment. OPEC has jawboned the market all year long, raising expectations of a production freeze in the spring at the Doha meeting, only to disappoint. Then in September, the Algiers accord refueled expectations of coordinated action, leading to another two months of volatility.
But with the deal signed, which could take 1.2 million barrels per day of OPEC production off of the market plus the reduction of another 558,000 in non-OPEC production, there is arguably more certainty in the markets today than at any point in the past two years. And investors have taken note. Hedge funds and money managers are feeling optimistic, and they have taken net-long positions to the highest point since July 2014. For the week ending on December 13, the latest for which data is available, long bets on WTI rose 2.5 percent while short bets plunged by 30 percent.
Related: Oil Seesaws As Markets Wait For OPEC Cuts To Materialize
Of course, the pendulum could always swing back in the other direction, as it often does. OPEC has a tendency to cheat, as even former Saudi oil minister Ali al-Naimi recently admitted, so the production cuts are not inevitable. And because oil speculators have now built up such a preponderance of net-long positions, the risk is that some piece of news surfaces in the next few months – for example, OPEC data showing members not adhering to cuts – that sparks a selloff. Whenever speculators rush to one side, they increase the likelihood that things unwind, initiating a stampede back in the other direction. So, oil prices could rise in the weeks ahead as OPEC begins to cut, but speculators could be forced into a sell off if OPEC disappoints.
By Charles Kennedy of Oilprice.com
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