Hedge funds eye oil's year-end 'high note' after bumpy 2017

[NEW YORK] Oil's bumpy ride to higher ground this year is winding down with a good dose of optimism that 2018 will be even better.

Hedge funds boosted their bets on rising Brent crude to a record, with bullish wagers on West Texas Intermediate (WTI) oil near a nine-month high. The optimism is largely fuelled by confidence that the extension of Opec (Organization of the Petroleum Exporting Countries) output curbs will tighten up markets next year.

"In general, money managers are ending the year on a high note, certainly a little more optimistic than where they started and where we were at the middle of the year," said Ashley Petersen, lead oil analyst at Stratas Advisors in New York.

"The US remains kind of a big risk next year in terms of increasing supply, but the international picture is still pretty optimistic and pretty bright with Opec controlling supply and demand strong."

Opec's secretary general Mohammad Barkindo said the producer group is close to its goal of rebalancing markets and the International Energy Agency (IEA) said oil inventories in developed nations have slid to the lowest since July 2015. Opec upped the implementation of promised cuts in November to 115 per cent, the highest rate since the agreement began, according to the IEA.

"Post-Opec, you can't be short," said Chris Kettenmann, chief energy strategist at Macro Risk Advisors LLC. "Opec restored a tremendous amount of credibility."

Brent is up about 40 per cent since hitting bottom in late June, while WTI has gained about 35 per cent.

The Brent net-long position - the difference between bets on a price increase and wagers on a drop - rose 1.8 per cent to a record 544,051 contracts, according to data from ICE Futures Europe. Longs increased for a third week, also hitting an all-time high, while shorts slid by 2.2 per cent.

Money managers cut their WTI net-long position by 0.4 per cent to 390,874 futures and options in the week ended Dec 12, according to data from the US Commodity Futures Trading Commission on Friday. Longs edged lower by 0.9 per cent and shorts fell by 5.1 per cent.

During the report week, money managers were also slightly more bullish on Brent than WTI due to the outage on the Ineos Group Ltd-operated Forties Pipeline System in the North Sea that sent prices surging to two-year highs, according to Rob Haworth, who helps oversee US$150 billion in assets at US Bank Wealth Management in Seattle.

The net-short position of swap dealers, an indication of hedging, increased for a ninth week to a fresh record, according to the CFTC data.

In the fuel market, money managers reduced their net-long position on benchmark US petrol by 9.9 per cent. Meanwhile, the net-bullish position on diesel rose by 4.1 per cent.

Kuwait's new oil minister, Bakheet Al-Rashidi, said global crude demand will increase at a "healthy" pace next year. JPMorgan Chase & Co boosted its oil forecasts for 2018, saying prices have remained "broadly stable, reflecting solid fundamentals and tightening balances".

Meanwhile, oil options trading shows increasing bets on Brent at US$80 a barrel from the middle of next year.

Front-month Brent contracts are trading at a premium to later-dated ones, a market structure known as backwardation that signals strong demand and tighter supply. Brent futures for December 2018 were US$2.61 higher than the December 2019 contracts on Friday. Most of the WTI curve is also in backwardation.

Money managers are "certainly very positive" Mr Haworth said. "They continue to really believe in demand growth and Opec's conviction to take control of this market and drive prices higher."

BLOOMBERG