Hedge Funds Signal Trust in OPEC as Short-Sellers Retreat

(Bloomberg) -- Hedge funds are giving Saudi Arabia and Russia a big vote of confidence.

As the two oil powerhouses pushed for the extension of supply curbs ahead of Thursday’s OPEC meeting, money managers shifted their stance on West Texas Intermediate crude to the most bullish since February. That’s largely due to a strong decline in short-selling. Bets on rising Brent crude also increased as short positions slumped.

“There was definitely a consensus that we were going to see a six- to nine-month extension, so to be short in front of that obviously would not be a good positioning for hedge funds,” said Nick Holmes, an analyst at Tortoise Capital Advisors LLC, which manages $16 billion in energy-related assets. “There was definitely some bullishness that we were going to see a pretty good result out of OPEC, which we did.”

Hedge Funds Signal Trust in OPEC as Short-Sellers Retreat

The Organization of Petroleum Exporting Countries and partners including Russia agreed on Thursday in Vienna to continue their output cutbacks until the end of next year. Russia’s Energy Minister Alexander Novak said after the meeting that the deal was extended to show “long-term commitment” and it provides the opportunity for changes next year if needed.

Hedge funds raised their WTI net-long position -- the difference between bets on a price increase and wagers on a drop -- by 15 percent to 396,484 futures and options in the week ended Nov. 28, according to data from the U.S. Commodity Futures Trading Commission. Shorts dropped by 39 percent, while longs advanced 6.5 percent.

The Brent net-long position rose by 2.2 percent to 537,979 contracts, according to data from ICE Futures Europe. Longs increased by 1.1 percent, while shorts declined 9.1 percent to the lowest level since February.

In the fuel market, money managers reduced their net-long position on benchmark U.S. gasoline by 3.1 percent. Meanwhile, the net-bullish position on diesel climbed 3.2 percent to a fresh record.

WTI and Brent are trading near two-year highs after surging more than 20 percent over the past three months as Saudi Arabia and Russia gradually built momentum for their decision to prolong supply cuts. At the same time, stockpiles in the U.S. have dropped significantly from their March peak. In the week to Nov. 24, crude inventories fell to their lowest since January 2016.

The increase in prices could prompt hedge funds to take advantage and profit from selling, according to Mark Watkins, a Park City, Utah-based regional investment manager at U.S. Bank Wealth Management, which oversees $142 billion in assets.

‘Starting to Work’

“But longer-term, the re-balancing trade is starting to work, so if they are in it for that longer-term play, keeping a long position would make sense,” Watkins said in a phone interview.

The question mark is the U.S. shale response. UBS Group AG warned that any further rise in oil prices would probably ignite U.S. output, while Barclays Plc said that OPEC’s extension might boost nationwide production by another 1 million barrels a day by the end of next year. Yet Goldman Sachs Group Inc. said the duration of OPEC’s cuts helps to lessen the risk of a large increase in production from high available spare capacity.

Hedge Funds Signal Trust in OPEC as Short-Sellers Retreat

Going forward, if “inventories are dropping down and you’re not seeing a huge supply-side response from shale producers, then I think we’re going to increase open interest on the longs,” said Bart Melek, head of global commodity strategy at TD Securities in Toronto.

©2017 Bloomberg L.P.