(Bloomberg) -- OPEC has done it again.
Talk of a potential deal to freeze output helped push oil close to $50 a barrel and prompted money managers to cut bets on falling prices by the most ever. West Texas Intermediate, the U.S. benchmark, went from a bull to a bear market in less than three weeks.
OPEC is on course to agree to a production freeze because its biggest members are pumping flat-out, said Chakib Khelil, the group’s former president. Saudi Energy Minister Khalid Al-Falih said that the talks may lead to action to stabilize the market.
"This is all courtesy of some very well-timed comments from the Saudi oil minister," said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. "They’ve been successful over the last year in jawboning the market, and this is the latest example."
Hedge funds trimmed their short position in WTI by 56,907 futures and options during the week ended Aug. 16, the most in data going back to 2006, according to the Commodity Futures Trading Commission. Futures rose 8.9 percent to $46.58 a barrel in the report week and closed at $48.52 a barrel on Aug. 19. WTI is up more than 20 percent from its Aug. 2 low, meeting the common definition of a bull market.
"This was a very short market so we were bound to get some covering," said Stephen Schork, president of the Schork Group Inc., a consulting company in Villanova, Pennsylvania. "You probably won’t hear a lot from OPEC with prices up here, but if we get down to where we were a few weeks ago we can expect to hear more."
The Organization of Petroleum Exporting Countries plans to hold informal talks to discuss the market at the International Energy Forum next month in Algiers. Russian Energy Minister Alexander Novak said that the nation was open to discussing a freeze.
Talks to implement a production freeze collapsed in April when Saudi Arabia said it wouldn’t take part without Iranian participation. Iran was restoring exports after sanctions over its nuclear program were lifted in January.
Saudi Arabia, Iran, Iraq and non-member Russia are producing at, or close to, maximum capacity, Khelil said in a Bloomberg Television interview on Aug. 17. Saudi Arabia told OPEC that its production rose to an all-time high of 10.67 million barrels a day in July, according to a report from the group.
Declining crude and gasoline stockpiles in the U.S. also bolstered the market last week. Crude supplies dropped by 2.51 million barrels as of Aug. 12, Energy Information Administration data show. Gasoline inventories slipped 2.72 million barrels during the period. Stockpiles of both crude and gasoline remain at the highest seasonal levels in decades even after the declines.
"There’s a high level of uncertainty right now, so fairly small news can move the market a lot," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "It still remains the case that we have a huge surplus of supply and aren’t going to see it disappear anytime soon."
Money managers’ short position in WTI dropped to 163,232 futures and options. Longs, or bets on rising prices, increased 0.1 percent, while net longs advanced 56 percent, the most since July 2010.
In other markets, net-bearish bets on gasoline climbed 54 percent to 1,970 contracts. Gasoline futures rose 5.7 percent in the report week. Net-long wagers on U.S. ultra low sulfur diesel increased more than fivefold to 10,835 contracts. Futures advanced 9.8 percent.
A backlog of drilled but uncompleted wells, or DUCs, helps support the bearish case, said Ed Morse, head of commodities research at Citigroup Inc. in New York. There’s also been an upsurge in drilling as prices have climbed. U.S. producers added oil rigs for an eighth week, the longest run since April 2014, according to Baker Hughes Inc. data on Aug. 19.
"In the U.S., DUC completion and the drilling of new wells are changing the production outlook," Morse said. "We might see U.S. production rise next year instead of falling."