After a disastrous couple of years which saw the oil price fall below $35 a barrel we have seen a partial recovery to the current level of $55 amid speculation that hedge funds are banking on a significant recovery. Regulatory data seems to indicate that the net long position on oil is at its highest since 2014 suggesting hedge fund managers believe the recent announcements by OPEC will result in a reduction in the current glut of oil.
Net positive position
Official exchange data has confirmed an ever-growing bullish outlook for the oil price with the equivalent of a net 820 million barrels now “in the hands of speculators”. To put this in layman’s terms, 820 million barrels equates to 9 days global consumption of the black gold. This latest positive move will go down well with the UK authorities where the net tax take from oil fields in the North Sea has fallen to zero. Indeed, if you count the various tax incentives and decommissioning assistance the net income from the North Sea is now negative.
Can OPEC make reductions stick?
Those who follow OPEC will be reluctant to bet the house on members adhering to recent agreements to significantly reduce output. Perhaps the one major difference from the previous attempts is the determination of the Saudi Arabian authorities to push the oil price higher. Saudi Arabia is in effect the kingpin of the oil industry and will ultimately dictate the short, medium and long-term direction of the oil price.
It is also interesting to see other countries joining the OPEC movement to increase the price of oil with Russia recently suggesting it will trade between $50 and $60 a barrel in the short term before moving higher. There does seem to be a concerted effort to bring production under control at a time when the worldwide economy is starting to show signs of a long-term recovery. Whether these agreed reductions stick is pivotal to the industry going forward.
Are the hedge managers fully invested in oil?
While the net position in oil is at a record level it is worth noting that the price is still hanging around the $55 level. We have seen a concerted recovery from $33 back in February year but it would potentially take another injection of investment funds to push the price beyond $60. So, there is some concern that hedge fund managers may be fully invested in oil at the moment therefore the additional capital needed to give the price that extra boost may not be forthcoming in the short term.
It is also worth noting that shale oil companies are ramping up their production in the US after a difficult couple of years. There is therefore the potential for further oil to come onto the market which could hold the price back in the short term. However, if the worldwide economy was to continue its recovery after a difficult few years this in itself would have a major impact upon demand for oil.
So, while there are many reasons to be positive about the price of oil in the short to medium term there are also concerns that the recent rally may not hold.