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Opec convinces investors that its oil output cuts are real

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The Organization of Petroleum Exporting Countries (Opec) appears to have persuaded investors that it's making good on promised production cuts.

[NEW YORK] The Organization of Petroleum Exporting Countries (Opec) appears to have persuaded investors that it's making good on promised production cuts.

Money managers are the most optimistic on West Texas Intermediate oil prices in at least a decade as Opec and other producers reduce crude output. Saudi Arabia has said more than 80 per cent of the targeted reduction of 1.8 million barrels a day has been implemented. Oil shipments from Opec are plunging this month, according to tanker-tracker Petro-Logistics SA.

"All the signs are pointing to a pretty significant Opec cut," Mike Wittner, head of commodities research at Societe Generale SA in New York, said by telephone.

"Until this week we were only getting data from the producers, now the tanker traffic seems to be supporting this view."

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Opec will reduce supply by 900,000 barrels a day in January, the first month of the accord's implementation, said the Geneva-based Petro-Logistics. That's about 75 per cent of the cut that the producer group agreed to make. Eleven non-members led by Russia are to curb their output in support.

Hedge funds boosted their net-long position, or the difference between bets on a price increase and wagers on a decline, by 6.1 per cent in the week ended Jan 24, US Commodity Futures Trading Commission data show. WTI rose 1.3 per cent to US$53.18 a barrel in the report week. The US benchmark slipped 0.3 per cent to US$53.01 at 9.18am London time on Monday.

Opec members Saudi Arabia, Kuwait and Algeria have said they've cut output this month by even more than was required, while Russia said it's also curbing production faster than was agreed. Saudi Energy Minister Khalid Al-Falih said Jan 22 that adherence has been so good that Opec probably won't need to extend the accord when it expires in the middle of the year.

The Opec-engineered price rally has spurred a surge in drilling in the US shale patch. Rigs targeting crude in the US rose by 15 to 566 last week, the highest since November 2015, according to Baker Hughes Inc.

"There's one headwind in the oil market: increased US shale production," Jay Hatfield, a New York-based portfolio manager of the InfraCap MLP exchange-traded fund with US$175 million in assets, said by telephone.

"US output in 2017 will be one million barrels a day higher than last year."

US crude production climbed to 8.96 million barrels a day in the week ended Jan 20, the highest since April, according to the Energy Information Administration. That's already closing in on the EIA's latest 2017 output forecast of 9 million barrels a day that was issued Jan 10.

The net-long position in WTI rose by 21,429 futures and options to 370,939, the most in data going back to 2006. Longs rose 3.7 per cent to a record high, while shorts slipped 11 per cent.

In fuel markets, net-bullish bets on gasoline fell 3.4 per cent to 61,511 contracts as futures decreased 1.5 per cent in the report week. Money managers increased wagers on higher ultra low sulfur diesel prices by 1.3 per cent to 34,978 contracts, while futures slid 0.4 per cent. 

"For the time being the market is more focused on the Opec cuts than about how fast US shale drillers are returning," Mr Wittner said.

"There may come a point soon when the support provided by Opec will be outweighed by the prospect of rising US production. When that happens there will be a big shift in investor sentiment."

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