(Bloomberg) -- Investors skeptical that OPEC would cut output fled the market after the group came to an agreement.
Money managers slashed bets on lower West Texas Intermediate crude prices by the most in five years after OPEC's Nov. 30 accord to reduce supply. The deal sent futures to a 16-month high, which some U.S. shale producers used as an opportunity to hedge their own output. Prices are extending gains this week after Saudi Arabia signaled Saturday it would make deeper cuts than expected just after Russia and other non-OPEC countries pledged to curtail production next year.
The Organization of Petroleum Exporting Countries agreed to reduce oil production by 1.2 million barrels a day for six months starting in January, seeking to curb the global oversupply. In Vienna on Saturday, the group met with non-member producers who agreed to pitch in with an additional 558,000 barrels a day of cuts.
"This is both a reaction to the OPEC decision to cut production and anticipation that prices have further to rise," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by telephone. "This data shows that we're already crediting them with some degree of rebalancing the market."
Speculators reduced wagers on falling prices in the week ended Dec. 6 while adding bets on a rally, U.S. Commodity Futures Trading Commission data show. CME Group reported that the volume of WTI futures and call options grew to all-time highs on Nov. 30. Money managers boosted long and net-long positions in Brent oil to a record during the week, according to data from ICE Futures Europe.
WTI surged 13% to $50.93 a barrel in the report week. On Monday the U.S. benchmark advanced as much as 5.8% to $54.51, and traded at $53.69 at 8:45 a.m.
MARKET BALANCE
Saudi Arabia agreed on Nov. 30 to cut its production to 10.06 million barrels a day, down from a record high of almost 10.7 million a day in July.
"I can tell you with absolute certainty that effective Jan. 1 we're going to cut and cut substantially to be below the level that we have committed to on Nov. 30," Saudi Oil Minister Khalid al-Falih said after Saturday's meeting.
Money managers' short positions in WTI, or bets on lower prices, dropped by 45% to 80,285 futures and options, the biggest percentage decline since March 2011. Longs rose 4.6% while net length climbed 43%.
In the Brent market, hedge funds boosted long positions by 19% to 518,376 during the week, the highest in data going back to 2011. The net-long position in the global benchmark surged by 46% during the week to 452,585, also a record.
SHALE DRILLERS
U.S. oil companies are using the post-OPEC rally to hedge their oil price risk for next year and 2018 above $50 a barrel, potentially boosting U.S. output next year. Producers' short positions, protecting against a drop in prices, increased to 657,487 futures and options, the most since 2010, according to the CFTC.
U.S. crude inventories at 485.8 million barrels are at the highest seasonal level in at least 30 years, Energy Information Administration data show. Total fuel demand slipped 1.4% to an average 19.6 million barrels a day in the four weeks ended Dec. 2, the lowest since April.
"This tells me that a lot of U.S. output is going to be coming on line early next year because they've sold forward production," Stephen Schork, president of Schork Group, a consulting company in Villanova, Pennsylvania, said by telephone. "The market still faces big, strong headwinds. Inventories are still very high, demand is suspect."
Rigs targeting crude in the U.S. rose by 21 last week, the biggest gain since July 2015, according to Baker Hughes data. The EIA on Dec. 6 raised its 2017 U.S. output forecast for a sixth straight month.
In fuel markets, net-bullish bets on gasoline surged 83% to 40,473 contracts, while money managers more than doubled bullish wagers on ultra-low sulfur diesel to 24,290 contracts. Both fuels climbed 12%.
The agreement among countries that supply more than half of the world's oil may speed the anticipated rebalancing of the global market in 2017 and support higher prices.
"The Saudis' latest deal with non-OPEC countries could potentially boost Brent crude prices toward $60 this week," said Gordon Kwan, head of Asia oil and gas research at Nomura Holdings in Hong Kong. "We doubt the return of the U.S. shale production could be quick enough or large enough to prevent spiking oil prices in the weeks ahead."
