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Opec wins investors back as cuts prompt record bets on oil

New York - The members of the Organisation of Petroleum Exporting Countries (Opec) have never taken supply cuts so seriously, and hedge funds are loving it.

Investor optimism that West Texas Intermediate oil prices will rise reached an all-time high as Opec delivers on pledges to reduce production.

The International Energy Agency (IEA) said the group has achieved a record 90% initial compliance with an output accord.

The US benchmark has traded between $50.71 and $54.34 since January 10 as balancing forces - the Opec curbs and the US shale boom - have kept volatility to a minimum.

"The Opec cuts so far are a little bigger than expected and there’s no sign that they are backing down," Mike Wittner, head of commodities research at Societe Generale in New York, said by telephone.

"This feeds into expectations that we’re heading into a balanced market."

Saudi Arabia reduced output in January by even more than it had committed, according to both the IEA and to what the kingdom told Opec.

Eleven non-Opec members who joined the agreement, including Russia, have made about half their pledged cuts, the IEA said in its monthly report on February 10.

The IEA increased its estimates of 2016 world oil demand growth for a third month, and boosted its outlook for 2017, anticipating an increase of 1.4 million barrels a day in consumption this year.

World oil inventories will fall by 600 000 barrels a day during the first half of the year if Opec sticks to its agreement, the IEA said.

Hedge funds boosted their net-long position on WTI, or the difference between bets on a price increase and wagers on a decline, by 8.6% in the week ended February 14, US Commodity Futures Trading Commission data show.

After some hesitation in the previous week, it was the fifth time this year that they’ve upped their bullish stance, and the third they took it to a new record.

Investor confidence

"Money managers have confidence that there will be either a further, ongoing investor flow that will keep prices elevated, OPEC cuts will continue and start reducing inventories, or increased demand will reduce supply in the second half of the year," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by telephone.

WTI rose 2% to $53.20 a barrel in the report week, and closed at $53.40 on February 17. Futures traded in a $1.27-a-barrel band last week, the smallest trading range since January 2004. It was trading 0.2% higher at $53.50 a barrel at 1:51 in Hong Kong.

Oil has traded above $50 a barrel in New York since Opec and it’s partners started trimming supply on January 1. Futures at that level are stoking a revival in US shale drilling that’s countering Opec's efforts.

American oil drillers boosted the rig count by 6 to 597 last week, the highest number since October 2015, according to Baker Hughes.

As they boost output, American oil producers are hedging their price risk for this year and 2018. Producers’ short positions, protecting against a drop in prices, increased to 755 874 futures and options, the most since August 2007, according to the CFTC.

Record stockpiles

US crude inventories climbed to 518.1 million in the week ended February 10, the highest level in weekly data going back to 1982, according to the Energy Information Administration.

Production in the lower 48 states rose to 8.47 million barrels a day during the same period, the highest since April.

Money managers’ net-long position in WTI increased by 30,951 futures and options to 390 338, the most in data going back to 2006. Longs rose 3.1 percent to an all-time high, while shorts tumbled 30%.

In fuel markets, net-bullish bets on gasoline rose 1.3% to 49 374 contracts as futures advanced 4% in the report week. Money managers trimmed net-bullish wagers on ultra-low sulphur diesel by 8.9% to 31 561 contracts, the lowest this year, as futures climbed 1%.

"They are more focused on the Opec outlook than on current inventory levels," Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by telephone.

"The last inventory build, which sent us to a record, should dampen some of the enthusiasm."

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