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[NEW YORK] Opec has never taken supply cuts so seriously, and hedge funds are loving it.
Investor optimism that West Texas Intermediate oil prices will rise reached an all-time high as the Organization of Petroleum Exporting Countries (Opec) delivered on pledges to reduce production.
The International Energy Agency said the group has achieved a record 90 per cent initial compliance with an output accord. The US benchmark has traded between US$50.71 and US$54.34 since Jan 10 as balancing forces - the Opec curbs and the US shale boom - have kept volatility to a minimum.
"The Opec cuts so far are a little bigger than expected and there's no sign that they are backing down," Mike Wittner, head of commodities research at Societe Generale SA in New York, said by telephone.
"This feeds into expectations that we're heading into a balanced market."
Saudi Arabia reduced output in January by even more than it had committed, according to both the IEA and to what the kingdom told Opec. Eleven non-Opec members who joined the agreement, including Russia, have made about half their pledged cuts, the IEA said in its monthly report on Feb 10.
The IEA increased its estimates of 2016 world oil demand growth for a third month, and boosted its outlook for 2017, anticipating an increase of 1.4 million barrels a day in consumption this year. World oil inventories will fall by 600,000 barrels a day during the first half of the year if Opec sticks to its agreement, the IEA said.
Hedge funds boosted their net-long position on WTI, or the difference between bets on a price increase and wagers on a decline, by 8.6 per cent in the week ended Feb 14, US Commodity Futures Trading Commission data show.
After some hesitation in the previous week, it was the fifth time this year that they've upped their bullish stance, and the third they took it to a new record.
"Money managers have confidence that there will be either a further, ongoing investor flow that will keep prices elevated, Opec cuts will continue and start reducing inventories, or increased demand will reduce supply in the second half of the year," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by telephone.
WTI rose two per cent to US$53.20 a barrel in the report week, and closed at US$53.40 on Feb 17. Futures traded in a US$1.27-a-barrel band last week, the smallest trading range since January 2004. Oil was trading up 0.6 per cent at US$53.74 a barrel as of 9.30am London time on Monday.
Crude has traded above US$50 a barrel in New York since Opec and its partners started trimming supply on Jan 1. Futures at that level are stoking a revival in US shale drilling that's countering Opec's efforts. American oil drillers boosted the rig count by six to 597 last week, the highest number since October 2015, according to Baker Hughes Inc.
As they increase output, American oil producers are hedging their price risk for this year and 2018. Producers' short positions, protecting against a drop in prices, increased to 755,874 futures and options, the most since August 2007, according to the CFTC.
US crude inventories climbed to 518.1 million barrels in the week ended Feb. 10, the highest level in weekly data going back to 1982, according to the Energy Information Administration. Production in the lower 48 states rose to 8.47 million barrels a day during the same period, the highest since April.
Money managers' net-long position in WTI increased by 30,951 futures and options to 390,338, the most in data going back to 2006. Longs rose 3.1 per cent to an all-time high, while shorts tumbled 30 per cent.
In fuel markets, net-bullish bets on gasoline increased 1.3 per cent to 49,374 contracts as futures advanced four per cent in the report week. Money managers trimmed net-bullish wagers on ultra low sulfur diesel by 8.9 per cent to 31,561 contracts, the lowest this year, as futures climbed one per cent.
"They are more focused on the Opec outlook than on current inventory levels," Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by telephone.
"The last inventory build, which sent us to a record, should dampen some of the enthusiasm."