In a move officially designed to support “oil market stability,” OPEC+’s recent production cuts caught the market by surprise, throwing short sellers under the bus.
Amid oil price sell-offs following last month’s banking sector jitters, senior OPEC+ officials spent weeks reassuring market participants that the oil slump did not justify any changes to the production cut agreement. Until they decided it was.
A day before a regularly scheduled OPEC+ panel meeting, the biggest OPEC producers in the Middle East and several other members of the OPEC+ pact announced a total of 1.16 million bpd of new production cuts on a Sunday. The cut comes in addition to Russia’s current 500,000 bpd cut, which was extended through the end of the year.
Saudi Arabia will cut 500,000 bpd and said the move was “a precautionary measure to support oil market stability”.
The announcement came just as markets were closing and OPEC+ has undoubtedly bet on a surge in oil prices the moment markets were opening. Oil rose $6 a barrel on Monday after the announcement, the biggest single-day rise in prices in over a year.
Aside from attempting to bring Brent crude prices down to $80, the alliance followed the proverbial promise made by Saudi Energy Minister Prince Abdulaziz bin Salman in 2020: “I will make sure that everyone who plays in this market, ouch as hell. “
The latest data from the exchanges showed massive short covering and renewed buying frenzy in oil futures in the two days after OPEC+ announced it would keep more than 1 million bpd out of the market for the rest of the year.
Money managers bought the equivalent of 128 million barrels in the top six petroleum futures and options contracts in the week ended April 4, with buying heavily focused on Brent and WTI crude oil futures, according to stock market data provided by Portal market analyst John Kemp.
Short positions in Brent were trimmed a massive 46% in the week ended April 4, the steepest weekly decline in bearish bets in data since 2011, according to estimates from Bloomberg.
With the announcement of more cuts, OPEC+ recalibrated hedge fund positioning to late January levels, ahead of the recession and banking sector fears that pushed oil prices below $80 a barrel to a 15-month low.
A combination of new long positions and short covering increased the net long position – the difference between bullish and bearish bets – in both crude oil contracts.
OPEC+’s surprise production cut sparked the biggest buying spree in WTI and Brent crude futures since December 2016, Saxo Bank’s head of commodity strategy Ole Hansen said on Tuesday, commenting on the Commitment of Traders report for the week to to April 4th.
Hedge funds and other asset managers “were pushed back to the buy side after OPEC+ rocked markets with a surprise production cut,” Hansen said.
“In the week ending April 4, and particularly this past Monday, April 3, hedge funds became aggressive buyers, thereby increasing their net long by the largest amount since November 2016.”
Brent buying — with 29,000 short-covering contracts to 44,000 new longs — was the second-highest weekly increase in length on record, while the rise in net long WTI was mostly due to short-covering, Hansen noted .
However, the market could be in danger of a correction given that oil has been trading in a very tight range and there has been no follow-up buying since the April 3 price surge, he said.
Amid lower than usual trading volumes due to the Easter holidays over the past few days, the market is now awaiting news on the demand outlook.
By Tsvetana Paraskova for Oilprice.com
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