Opec skeptics flee as production cut rockets oil past $50

New York - Investors sceptical that Organisation of Petroleum Exporting Countries (Opec) would cut output fled the market after the group came to an agreement.

Money managers slashed bets on lower West Texas Intermediate (IEA) crude prices by the most in five years after group’s November 30 accord to reduce supply.

The deal sent futures to a 16-month high, which some US shale producers used as an opportunity to hedge their own output.

Prices are poised for further gains this week after Saudi Arabia signalled on Saturday it would make deeper cuts than expected just after Russia and other non-Opec countries pledged to cut output next year.

Opec agreed to curtail oil production by 1.2 million barrels a day for six months starting in January, seeking to reduce global oversupply.
 
Opec met with non-member producers in Vienna on Saturday who agreed to pitch in with an additional 558 000 barrels a day of cuts.

"This is both a reaction to the Opec decision to cut production and anticipation that prices have further to rise," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by telephone.

"This data shows that we’re already crediting them with some degree of rebalancing the market."

Speculators reduced wagers on falling prices in the week ended December 6 while adding bets on a rally, US Commodity Futures Trading Commission data show. CME Group reported that volume of WTI futures and call options grew to all-time highs on November 30.

WTI surged 13% to $50.93 a barrel in the report week. On Monday the US benchmark added as much as 5.8% to $54.51, and traded at $53.94 at 12:29 Singapore time.

Market balance

Saudi Arabia agreed with Opec on November 30 to cut its production to 10.06 million barrels a day, down from a record high of nearly 10.7 million barrels in July.

"I can tell you with absolute certainty that effective January 1 we’re going to cut and cut substantially to be below the level that we have committed to on November 30," Saudi oil minister Khalid al-Falih said after Saturday’s meeting.

Money managers’ short positions in WTI, or bets on lower prices, dropped by 45% to 80 285 futures and options, the biggest percentage decline since March 2011. Longs rose 4.6% while net length climbed 43%.

US oil companies are using the post-Opec rally to hedge their oil price risk for next year and 2018 above $50 a barrel, potentially boosting US output next year.

Producers’ short positions, protecting against a drop in prices, increased to 657 487 futures and options, the most since 2010, according to the CFTC.

US crude inventories at 485.8 million barrels are at the highest seasonal level in at least 30 years, EIA- data show.

Total fuel demand slipped 1.4% to an average 19.6 million barrels a day in the four weeks ended December 2, the lowest since April.

"This tells me that a lot of US output is going to be coming on line early next year because they’ve sold forward production," Stephen Schork, president of the Schork Group, a consulting company in Villanova, Pennsylvania, said by telephone.

"The market still faces big, strong headwinds. Inventories are still very high, demand is suspect."

Rigs targeting crude in the US rose by 21 last week, the biggest gain since July 2015, according to Baker Hughes data. The IEA on December 6 raised its 2017 US output forecast for a sixth straight month.

In fuel markets, net-bullish bets on gasoline surged 83% to 40 473 contracts, while money managers more than doubled bullish wagers on ultra-low sulphur diesel to 24 290 contracts. Both fuels climbed 12%.

The deal among countries that supply more than half of the world’s oil may speed the anticipated rebalancing of the global market in 2017 and support higher prices.

"The Saudis’ latest deal with non-Opec countries could potentially boost Brent crude prices toward $60 this week," said Gordon Kwan, head of Asia oil and gas research at Nomura Holdings in Hong Kong.

"We doubt the return of the US shale production could be quick enough or large enough to prevent spiking oil prices in the weeks ahead."