Short Bets On Oil Spike Ahead Of OPEC Meeting

Short bets on Brent crude jumped by the most since June last week, signaling the return of uncertainty that OPEC will agree to extend the oil production cut deal it sealed a year ago.

Data from CFTC cited by Bloomberg revealed that hedge funds increased their bearish bets on the international crude benchmark by 8.7 percent in the week to November 14. Interestingly, speculators were more bullish on WTI, with bets on a price increase for the U.S. benchmark rising by 10 percent.

At the beginning of this week, however, prices remained relatively unchanged from Friday as traders are wary of making any large bets on either benchmark ahead of the OPEC meeting next week. Reuters quoted traders as saying the market uncertainty was too high to motivate any large trades.

Meanwhile, the effect that heightened geopolitical tensions in the Middle East were having on oil prices seems to be subsiding in the absence of any further escalation in hostility. One analyst Bloomberg quoted said,"We haven’t seen more conflict. For prices to get a lot higher, you have to see a meaningful increase in disruptions—and we haven’t."

These tensions were one major factor behind the latest price rally, helped by upbeat forecasts about supply and demand. However, last week the International Energy Agency poured cold water on optimistic expectations by revising downwards its oil demand growth forecast for this year and next, sparking the usual worry these revisions cause.

Furthermore, there are reports that Russia may be unwilling to join another deal extension beyond March 2018 as Brent at US$60-65 suits the world’s top producer just fine. That’s on top of continuing growth of production in the U.S. shale patch and forecasts from the IEA that shale oil will rule supreme in the medium term.

In a note to clients last week, Morgan Stanley said that the OPEC meeting will be the single most important oil price driver through the end of the year, with the possibility of a delay in the extension decision potentially serving as the strongest headwind for prices.

By Irina Slav for Oilprice.com