There is a poker game being played in the oil market between oil producers and speculators, specifically hedge funds.
Since about March, hedge funds have been increasingly positioning themselves short of oil, arguing that rising inflation and high interest rates will hit consumers spending on items such as travel. Brent crude prices have responded in kind with a drop to between $70 and $75 a barrel, and WTI with a decline to around $66/bbl.
The decline was less than well received by OPEC+ and at their last ministerial panel in April oil ministers opted for a surprise production cut to stop prices from dropping further. OPEC+ said they would reduce output by 1.16 million barrels per day on top of the 2 million barrels reduction they had already agreed on in October; the latter will be in place until the end of 2023.
Russia was also part of these discussions despite Western sanctions and price caps on Russian oil.
As an aside, while US oil producers are not part of OPEC and are not involved in the decision-making process on OPEC’s production, local shale producers would have welcomed the cut because US shale is financially viable at around $65/bbl.
Consequently, oil prices rallied, but not for long. And now, just days before the next OPEC policy meeting on 4 June the scenario is being played out once more.
Hedge funds are going short, and OPEC+ is hinting at a further cut. Who wins this game of poker remains to be seen.
Shortest position since the start of COVID
Hedge funds have more than doubled their short positions by 16 May to 184 million barrels, according to the latest Commitment of Traders Report. This is still below the 204mn bbl short position they held before April; however, speculators’ view on oil is now as negative as it was at the start of COVID in 2020.
The recent tension over the 1 June deadline to lift the US debt ceiling has introduced additional volatility into all of the markets, including oil. It was always clear that Congress would agree on raising that ceiling before the deadline to avoid the US defaulting on its own debt but the fact that traders reacted to it in such a sensitive way tells us that there is a lot of underlying scepticism in the market, and not only in oil.
Which brings us back to OPEC+. The high level of shorts could push oil ministers into further output reduction, even if this had not been initially on the cartel’s agenda. Much will depend on what prices do next week.
The level which triggered the last production cut was just above $71/bbl. For the moment, Brent is still trading comfortably above $76/bbl thanks to the fact that one of the oil ministers said this week the market would be “ouching” after the June meeting.
By next week we will know who in this game was bluffing and who will have called the bluff. For smaller players this might be a game of extremely high stakes.
