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Oil investors waiting on Opec's word, expect production cut of 1.4 mn bpd

If Opec does not reduce production, prices could tumble to $40 a barrel, said Greg Sharenow, portfolio manager at PIMCO

Reuters  |  New York 

Opec, crude oil

Global markets are nervously eyeing Opec's upcoming meeting for clarity on future supply as the dust settles after a full-fledged rout in crude markets over the last several weeks.

So far, there is no clear view if production will be cut or remain steady, and that uncertainty raises the risk of more volatile trading after mass selling caused to drop by more than 30 percent in little over a month.

Participants generally expect will trim production at its Dec. 6 meeting by about 1.4 million barrels per day (bpd), but there is enough uncertainty to make traders defensive.

Speculators, once betting on $100-a-barrel oil, are now going the other direction, having boosted short positions in to their biggest in more than a year. The options market currently shows a record number of open positions in U.S. oil falling to $45 or $40 a barrel by the end of 2019, though bullish bets have also edged higher.

"Getting some resolution around the intent of the Saudis and ... would go a long way to helping the market feel better," said Greg Sharenow, at PIMCO, who co-manages more than $15 billion in commodity assets.

He added that if does not reduce production, prices could tumble to $40 a barrel.

The signals from the and its leader, Saudi Arabia, have been mixed. Officials familiar with Saudi plans told Reuters they expect it to trim production, but an industry source also said Saudi exceeded 11 mln bpd for the first time in November.

The cartel's deliberations have been compounded by the growing influence of Russia, whose production has climbed to a post-Soviet era high, and by the United States, which is now producing at a record 11.7 million bpd. Russian and officials have been skeptical of the need to cut output.

Meanwhile, the U.S. decision to reimpose sanctions on Iran, only to grant waivers to major importers of that nation's oil, threw the market for a loop.

Macro-focused and commodity trading advisory funds (CTAs) had bet on a further rally ahead of renewed U.S. sanctions on Iran, but instead were caught wrong-footed after waivers were announced and U.S. production surged faster than expected. Wall Street banks looking to protect against exposure from selling options to oil producers intensified that selling, market sources said.

Implied volatility, a gauge of options demand, soared, with U.S. crude implied volatility hitting its highest level since February 2016 last week.

The price swings hit funds hard. Among renowned oil bulls, the lost 4.1 percent for the month through Nov. 16, putting it down 15.7 percent for the year, according to data.

Open interest in bearish bets on U.S. crude falling to $45 or $40 a barrel by the end of 2019 are at record levels but bets on U.S. oil rising to $80 a barrel by end-2019 are also high , as some see the sell-off as having gone too far, too fast.

"As sharp as the falloff has been, I think the market is poised to have as sharp a comeback," said Shawn Reynolds, of the

In recent weeks, both Opec and the Energy Agency cut their demand forecasts due to sagging fortunes in developing economies. The forward futures curve - the market's primary indicator of expectations for supply and demand - now signals a potential glut through mid-2019.

CME Group's Opec Watch Tool, which uses option-market activity to predict the probability of Opec's decision, currently puts a 70 percent chance on a small Opec production cut and a 30 percent chance of little to no change in output.

This uncertainty is in part due to U.S. President Donald Trump, whose decision not to punish the Saudis for the killing of journalist Jamal Khashoggi has raised the possibility that the kingdom will be less inclined to cross Trump by cutting output dramatically.

"President Trump's tacit support of (known as MbS) in the wake of the Khashoggi murder seems to have provided him with significant leverage over the Saudi leadership," analysts said in a note.

 

(Reporting by Devika Krishna Kumar in New York; Additional reporting by Lawrence Delevingne; Editing by Tom Brown)

First Published: Wed, November 28 2018. 02:11 IST
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