Investor honeymoon with OPEC falters as shale drilling booms

Bloomberg

There are limits to investors’ love affair with OPEC. After unprecedented optimism that the Organization of Petroleum Exporting Countries will manage to ease a global supply glut, money managers reduced their bets on rising West Texas Intermediate prices for the first time in a month. While the group and other major exporters are pumping less crude, US inventories and production are on the rise, and shale drillers keep adding rigs. The US benchmark has traded mostly between $50 and $55 a barrel for the last two months. “There’s starting to be fatigue about the range we’ve been trading in,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by telephone. “It won’t be summer until we break out to the upside.”
OPEC achieved the best compliance rate in its history at the outset of its accord to cut production, a plan that’s being supported by strong demand, the International Energy Agency said in a Feb. 10 report. In the past, OPEC had often struggled to fully deliver promised cuts due to a reluctance to lose income and market share. Former Saudi Arabian Oil Minister Ali al-Naimi said on Dec. 2 that, in the history of OPEC deals, “the unfortunate part is we tend to cheat.” Meanwhile, US producers last week extended the biggest surge in oil drilling in more than four years as the prolific shale plays of Texas and Oklahoma lure investment from Exxon Mobil Corp. and Continental Resources Inc.
US crude output climbed to 8.98 million barrels a day in the week ended Feb. 3, according to the Energy Information Administration. That’s an increase of about half a million barrels a day from last year’s low, and the agency expects production to keep climbing to reach 9.53 million a day next year, the most since 1970.

TIGHT RANGE
Hedge funds cut their net-long position, or the difference between bets on a price increase and wagers on a decline, by 5.4 percent in the week ended Feb. 7, US Commodity Futures Trading Commission data show. WTI slipped 1.2 percent to $52.17 a barrel in the report week, and closed at $53.86 on Feb. 10. It was trading at $53.80 a barrel, down 6 cents, on Monday at 1:04 p.m in Hong Kong.
Money managers’ net-long position in WTI decreased by 20,540 futures and options to 359,387. Longs fell 1.8 percent, while shorts climbed 26 percent, the biggest gain in three months.

WILLING INVESTORS
“The shorts increased, which shows that there are investors willing to bet that the OPEC production cuts are fully priced into the market and that the oil bulls are vulnerable to bearish news,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by telephone. As they boost output, US oil producers are hedging their price risk for this year and 2018. Producers’ short positions, protecting against a drop in prices, increased to 707,498 futures and options, the most since August 2007, according to the CFTC.
Pioneer Natural Resources Co. plans to continue being a “heavy hedger,” Chief Operating Officer Tim Dove said last week. The company raised its drilling budget more than expected and is expanding its fleet of rigs in the Permian Basin. Pioneer’s hedges provide upside to about $62 a barrel, Dove said.
OPEC implemented 90 percent of promised output cuts in January, the first month of its agreement, according to the IEA. Eleven non-OPEC members who joined the agreement have made about half their pledged reductions, the agency said. “I think that we will be looking at the reverse of this report in a week,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by telephone. “The IEA report on compliance has dispelled doubts about OPEC’s adherence.”
Oil fell in New York, snapping a three-day gain on signs that OPEC’s production cuts will stimulate a recovery in US crude production.
Futures lost as much as 1.1 percent in New York after advancing 3.2 percent over the previous three sessions. OPEC has delivered 92 percent of the output curbs it pledged and its partners outside the group have implemented more than half their reduction, Kuwaiti Oil Minister Essam Al-Marzooq said. In the US, drillers increased the rig count to the highest since October 2015, according to Baker Hughes Inc.
Oil has fluctuated above $50 a barrel since the Organization of Petroleum Exporting Countries and 11 other nations started trimming supply from Jan. 1 to ease a global glut. The market will shift into a deficit during the first half of this year and US crude stockpiles will shrink amid a decline in imports as the curbs take effect, Goldman Sachs Group Inc. said last week.
“It’s a dilemma for OPEC,” Spencer Welch, director of oil markets and downstream at IHS Markit, said in a Bloomberg radio interview. “They want to help themselves, and by doing that they’re helping others as well. That’s unavoidable. OPEC is saying they can’t change what happens in the US, so yes, production will increase.”
Brent for April settlement fell as much as 66 cents, or 1.2 percent, to $56.04 a barrel on the London-based ICE Futures Europe exchange. Prices advanced $1.07, or 1.9 percent, to $56.70 on Friday. The global benchmark traded at a premium of $2.34 to April WTI.
The 11 OPEC nations bound by the accord reduced output by 1.12 million barrels a day to 29.93 million a day last month, according to a monthly report from the International Energy Agency published Feb. 10. Global oil inventories will fall by 600,000 barrels a day during the first half of the year if the group sticks to its agreement, the agency said. OPEC is due to release its monthly report Monday, offering the group’s first update on its progress.
Russia will decide in April or May on whether to extend the output-cut deal with OPEC, Energy Minister Alexander Novak told reporters, according to a report from state news service RIA Novosti.