Speculators’ bullish bets on crude oil are at their highest point since summer 2014, according to an analysis of money manager positions published in Reuters. Net long positions in U.S. WTI crude oil have reached 292 million barrels, a factor that has helped to push oil prices back above $50 per barrel. But the market isn’t reacting to a change in the supply and demand balance, it’s reacting to OPEC’s recent action in Algiers. Right now, OPEC is revealing just how far from dead it really is, and realizing how much it can accomplish with words and meetings alone.
Right now, OPEC is revealing just how far from dead it really is, and realizing how much it can accomplish with words and meetings alone.
Since August of this year, hedge funds have reduced their short positions (bets that oil prices will drop) in WTI futures and options by 146 million barrels—almost two thirds of the original volume. But supply and demand fundamentals haven’t shifted sufficiently to justify such a reversal. According to IEA’s October monthly Oil Market Report, global oil demand will grow by 1.2 million barrels per day (mbd)—in 2016 and 2017, which is actually below IEA’s August estimate of 1.4 million barrels per day for 2016.
Meanwhile, global supply is currently at 97.2 mbd according to IEA’s most recent report, up from 96.8 in August. Global crude oil inventories have seen a slight downtick, but global product stocks are up and have reached historic highs. Additionally, Libya and Nigeria’s export volumes have up-ticked since the summer’s chaos and the mammoth Kashagan megaproject has finally begun bringing volumes to market.
Russia has longstanding credibility issues when it comes to collaboration with OPEC and its decentralized and publicly traded oil industry is ill-suited to such activity.
Given the fact that global demand has fallen since August and supply has increased, we shouldn’t expect oil prices to have increased by 10 percent over the same period—yet they have. Why? OPEC’s unexpected decision in Algiers last month to finally give a number to the long-promised freeze deal is the only real explanation. But details on the freeze are scant. OPEC has given almost no information on how it plans to achieve its new 32.5-33.0 mbd target, leaving the hard work of determining per-country cuts to its November 30th meeting in Vienna, but the current understanding is that exemptions will be built in for Nigeria, Libya, and Iran, who are all producing well below their historic peaks. Of course, rumors that Russia may be along for the ride have helped to buoy prices but experienced market watchers know that the odds of a sustained or meaningful cut are close to zero. Russia has longstanding credibility issues when it comes to collaboration with OPEC and its decentralized and publicly traded oil industry is ill-suited to such activity.
At the moment crude oil prices are defying gravity—increasing even as fundamentals should be pushing them downwards. Furthermore, hedge funds are showing more optimism than at any point since mid-2014, at the very beginning of the historic price collapse. That means that even though OPEC has provided virtually zero evidence that it will execute an action that has a material impact on market fundamentals, it has still succeeded in flipping a switch on the market’s sentiment.