After Saudi Prince Ups The Ante, Oil Investors Roll The Dice On OPEC

Saudi Arabia is in the driver’s seat as the OPEC trade is back.

Hedge funds were almost as bullish on the global benchmark as they’ve ever been as Brent crude prices were propelled beyond $60 a barrel for the first time since 2015 just before the de facto OPEC leader doubled down on its plan to drain the oil glut. In February OPEC production cuts were fueling an oil price surge and short-sellers retreated to levels that were last seen at that time.

“Of course” he wanted to prolong the Organization of Petroleum Exporting Countries’ output-reduction deal into 2018, said Saudi Crown Prince Mohammed bin Salman in an interview with a television channel. An extension should run through at least the end of next year, Russia’s President Vladimir Putin had said earlier. And agreement is all but certain at a meeting in Vienna next month with the leaders of the world’s two biggest oil-exporting countries on board.

“We have evidence that people are positioned long into OPEC in November. The consensus trade on the street is that they’ll extend cuts,” Chris Kettenmann, chief energy strategist at Macro Risk Advisors LLC, said in an interview in New York. More seriousness around a potential extension of cuts has resulted as Prince Salman showed support for the cut.

The fundamentals are looking brighter, too. U.S. crude inventories are near the lowest levels since January 2016. Statoil ASA’s Chief Executive Officer Eldar Saetre said the oil market is “definitely balancing” and Saudi Arabia’s minister of energy and industry, Khalid Al-Falih, said oil demand is more resilient than people think.

here’s a stronger belief that the “supply-demand set-up has turned the corner, particularly with the push by the Saudis to keep the deal going and to drain global inventories,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said. “It’s worth betting that prices will go higher.”

As concern over rising U.S. stockpiles overshadowed confidence in OPEC’s efforts, things started going south in the oil market in March. Indications that the confidence is coming back is given by hedge fund bets and rising futures.

With long positions rising to the highest level in more than three years, money managers boosted their net-long position on benchmark U.S. gasoline by 11 percent, in the fuel market.

“People are starting to think that the global inventory situation is better than they thought,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said. “The contango is getting very small, which suggests the markets perceive we’re a lot closer to being rebalanced than people had thought earlier.”

“My concern is what happens now that we’re getting to these price-highs where we’ve typically seen a supply response,” Rob Haworth, who helps oversee $142 billion in assets at U.S. Bank Wealth Management in Seattle. “Fundamentally, you should see a supply response and that’s going to make it tougher for these bulls to hang in there.”

(Adapted from Bloomberg)

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Categories: Economy & Finance, Strategy, Sustainability, Uncategorized

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