Hedge funds get bullish on oil again as OPEC prepares to meet

[NEW YORK] After two months of cutting bets on rising prices, hedge funds are feeling optimistic again as OPEC prepares to meet.

Whether that optimism is warranted remains an open question.

Falling output from Iran and Venezuela briefly had analysts touting the possibility of US$100-a-barrel oil ahead, and hedge funds boosted wagers on a price rebound in the week ending on Tuesday. Since then, though, a push by Saudi Arabia and Russia for production increases ahead of next Friday's OPEC meeting has injected an uncertain new element into the picture, pushing futures in London down 4 per cent over two days.

"Traders are uncertain about how broad these production increases will be. It's hard to trust the numbers, especially when Saudi Arabia was recently talking about US$85-US$100 oil being pleasing to them," said John Kilduff, a partner at Again Capital LLC.

A decision to gradually increase production when OPEC and its allies meet in Vienna next weekend is "inevitable," Saudi Oil Minister Khalid Al-Falih said on Thursday after talks with his Russian counterpart in Moscow during a soccer World Cup match between the two nations.

The group, dubbed OPEC+, could consider an increase of as much as 1.5 million barrels a day, Russian Energy Minister Alexander Novak said. That would be enough to offset the supply losses from Venezuela and Iran foreseen by the International Energy Agency. Saudi Arabia has been discussing different scenarios that would raise production by between 500,000 and 1 million barrels a day, according to people familiar with the matter.

"Clearly, the increase in Brent positions didn't come at the right time," said Kyle Cooper, a consultant at ION Energy. "People saw the big drop in prices and thought, wait a second, we're oversold now and due for a bounce. If Saudi Arabia and OPEC don't just open up their spigots, the market still looks kind of tight."

Hedge funds increased their Brent net-long position -- the difference between bets on a price increase and wagers on a drop -- by 4.1 per cent to 455,943 futures and options during the week ended June 12, weekly ICE Futures Europe data show. Longs rose 2.9 per cent and shorts fell 4 per cent. Net bets on rising US crude prices rose slightly, while bullish wagers on gasoline and diesel plunged.

US President Donald Trump's tweets blaming OPEC for high oil prices are also helping push prices lower, said Stephen Schork, president of the Schork Group, an energy consulting company in Villanova, Pennsylvania.

"I would expect to see Wall Street bullishness to continue to decline when it comes to oil prices," he said. "I would think that you would continue to see the unwinding of length."

OTHER POSITIONS:

The net-long position on West Texas Intermediate rose 0.5 per cent to 315,063 contracts, according to the US Commodity Futures Trading Commission.

Money managers decreased their net-long position on benchmark U.S. gasoline by 18 per cent and the net-bullish position on diesel by about 10 per cent.

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