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Money managers, producers and consumers made the biggest bets on West Texas Intermediate crude prices in nine years, amid signals more volatility is coming.
Global markets were roiled after Donald Trump’s election as U.S. president and as OPEC continued negotiations on a deal to cap output. The U.S. dollar climbed to the highest since January. A measure of oil volatility surged last week to a seven-month high, a sign that traders were anticipating bigger price swings.
Wagers on higher and lower prices held by speculators and hedgers reached 1.47 million contracts in the week ended Nov. 15, the most since 2007, U.S. Commodity Futures Trading Commission data show. Trading volume of calls giving investors the right to purchase WTI futures rose to a record that day. The CBOE Crude Oil Volatility Index reached the highest since April. Brent oil shorts, bets that prices will fall, rose to the highest in more than two years.
“There’s tension in the market, with both producers and consumers worried about what OPEC does or won’t do on Nov. 30,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “They want to be protected from surprising price moves.”
OPEC Meeting
Investors are weighing the chances that the Organization of Petroleum Exporting Countries will complete a deal to cap output at its Nov. 30 meeting in Vienna. While Saudi Arabian Energy Minister Khalid Al-Falih told Al Arabiya television he’s optimistic a deal will be reached, only seven of 20 analysts surveyed by Bloomberg last week expect the group to set output targets for its members.
OPEC agreed in September to cut their collective output to 32.5 million to 33 million barrels a day and has been trying to persuade other suppliers, notably Russia, to join the cuts. OPEC Secretary General Mohammed Barkindo said he’s confident the group can reduce record oil inventories and bring forward the rebalancing of the market.
“The Saudis are working hard to reach a deal,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “You don’t fight the Fed in the bond market and when it comes to oil you don’t fight the Saudis.”
The September agreement marked the end of OPEC’s two-year long experiment with pumping at will. Saudi Arabia led the group in the effort to grab market share and curb the development of more expensive reserves such as U.S. shale.
U.S. Production
While U.S. production has dropped from last year’s 44-year high, the decline is slowing. The Energy Information Administration this month raised its output forecast for 2017. Rigs targeting oil in the U.S. rose the most in 16 months last week, according to Baker Hughes Inc.
Producers and merchants increased short positions, or protection against lower WTI prices, to the highest level since March 2011. They added 66,613 bearish contracts over the past two weeks as prices retreated from last month’s peak at above $50 a barrel.
“The Saudis want higher prices but won’t sacrifice just to see a major competitor, U.S. shale, benefit,” said Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts. “The Trump election changes things. In one day the U.S. shale business got better. The government will be more responsive to the industry.”
Money managers’ net-long position in WTI advanced for the first time since mid-October, climbing by 3,906 futures and options to 163,321. Shorts climbed 14 percent while longs rose 8.1 percent. WTI gained 1.8 percent to $45.81 a barrel in the report week. It rose 2.7 percent to $46.93 as of 8:48 a.m. on Monday.
Brent Bets
In the Brent market, money managers increased short positions by 11 percent to 157,016 during the week, the highest level since September 2014, according to data from ICE Futures Europe. The net-long position in the global benchmark slipped by 4.6 percent during the week to the lowest since January.
In fuel markets, net-bullish bets on gasoline decreased 35 percent to 25,796 contracts, as futures slipped 2.5 percent in the report week. Money managers were net-short 393 contracts of ultra low sulfur diesel, from net-long 7,791 the previous week. Futures advanced 0.2 percent.
“I suspect that when the OPEC meeting is over there will have been a lot more smoke than fire,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “If they don’t come up with a convincing agreement, they’ll be forced to revisit the issue before long.”
Oil fell around 3 percent on Monday after Iran dashed hopes of a coordinated production freeze any time soon, returning bearish sentiment over a supply glut that has sent prices crashing.
Global benchmark Brent crude futures LCOc1 fell back below $40 a barrel, trading at $39.27 at 1308 GMT, down $1.12 on Friday’s close. Brent hit a 12-year low of $27.10 in January.
U.S. crude CLc1 was down $1.09 at $37.41 a barrel.
“Oil is down because Iran said they would only join the output freeze group once they reached production of 4 million barrels a day,” said Tamas Varga, oil analyst at London brokerage PVM Oil Associates.
He was referring to comments by Iran’s oil minister Bijan Zanganeh on Sunday that the OPEC member would join discussions after its output reached that level.
Iran’s oil exports are due to reach 2 million bpd in the Iranian month that ends on March 19, up from 1.75 million in the previous month, he said.
Zanganeh met Russian counterpart Alexander Novak in Tehran on Monday but talks focused on long-running discussions about an oil and gas swap mechanism.
According to the Shana news agency, Zanganeh said Iran and Russia could cooperate on the swap, which would see Russia send oil and gas to northern Iran in return for Iranian supply to Russian customers in the Gulf.
Saudi Arabia appeared to have stuck to a preliminary deal with some other producers to freeze output, as its crude production held steady in February at 10.22 million barrels per day (bpd), an industry source told Reuters.
OPEC members and non-OPEC producers are likely to meet again in mid-April in Doha to discuss freezing output, OPEC sources told Reuters.
A March 20 meeting in Russia, which was part of an earlier plan, now looks unlikely.
Worries about demand fundamentals moved back into the spotlight as investment bank Morgan Stanley warned that a slowing global economy and high production would prevent any sharp rises in oil prices.
“Oil prices now seem to have bottomed, even though they are likely to stay subdued for the rest of this year before starting to move higher in 2017,” the U.S. bank said in a research note. It added that cheap oil had not provided the boost to growth that many had hoped for.
In a sign that investors are growing more skeptical about a rebound in oil prices, ICE data showed on Monday that speculators had cut net long positions in Brent crude by 9,500 contracts in the week to March 8.
Bjarne Schieldrop, chief commodities analyst at SEB Markets in Oslo, said a roughly 2 million bpd oil surplus would weigh down oil prices in the short term. The imminent restart of a pipeline between Iraq and Turkey and the breakdown in talks about a production freeze would add further downside, he said.
“We are likely to see $35 a barrel before we see $45 a barrel.”
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