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    Oil Prices Poised to Post Further Gains Amid Bullish Investor Sentiment

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    With international cuts in oil supply expected to take effect on 1 January, winter conditions and an acceleration in industrial production in many advanced economies, and the lingering disinvestment in global energy, oil prices are expected to break through the $60/bbl threshold in the near-term.

    Kristian Rouz – After the global oil cartel, OPEC, and non-OPEC crude producers negotiated a deal on supply cuts in the previous weeks, global crude prices have advanced due to the mounting upward pressure, lifting investor sentiment to its highest point since July 2014. With international demand for energy rising due to winter conditions and an expansion in manufacturing in the US, the UK, and Germany, among other advanced economies, Brent is widely expected to rise to the $60/bbl and, possibly, beyond.

    All these considerations have led investor sentiment regarding energy resources to become more optimistic than at any point since mid-2014, when gains in US shale production provoked a massive slump in the oil market.

    Wealth fund managers have increased their investment in the US energy sector due to the negotiated cuts in international oil supply and the expected acceleration in global oil demand. US oil prices hit a 17-month high in December, at $51.96/bbl, and by 19 December crude extended its rebound to roughly $52.20/bbl, with February 2017 futures contracts hitting $53.09/bbl.

    "There’s been a full embrace of the OPEC, non-OPEC deal," John Kilduff of the New York-based energy hedge fund Again Capital LLC said. "They are being given the benefit of the doubt. The consensus is that supplies will tighten quickly, and as a result investors are positioning for higher prices in the near term."

    Wealth managers’ net-long positions in WTI added 32,661 futures contracts, and 303,146 options in a fifth consecutive week of expansion. The OPEC oil cuts were announced on 30 November and will take effect on New Year’s Day. Money managers’ sentiment of fuel markets, however, deteriorated slightly, with contracts having dropped 4.6pc.

    A weaker dollar and setbacks in the Libyan oil supply also contributed to the bullish sentiment among energy investors. Brent crude has advanced to $55.47/bbl in the more balanced market.

    "It looks like the Libyan story and the weaker U.S. dollar are counterbalancing" long-standing oil pessimism, said Tamas Varga of PVM Oil Associates. "We should expect higher prices in the near-term future."

    Hedge funds in the US are expecting oil prices to gain further based on the recent market dynamics, according to data from the US Commodity Futures Trading Commission. Oil short contracts, or bets on the decline in crude prices, have fallen by 30pc, to their lowest since May.

    US bank JPMorgan Chase & Co revised upward their outlook on oil prices for 2017, expecting an across-the-board acceleration in industrial production, boosting demand for oil, while the global oil supply is exposed to the risks of further contraction. Aside from the OPEC-negotiated oil cuts, the international oil industry is starting to feel the effects of disinvestment, stemming from the two years of dismal low oil prices.

    Meanwhile, Wood McKenzie, Ltd., said that Russia’s Rosneft, the biggest oil corporation of the world’s leading oil-producing nation, is poised to increase its expansion in the global markets as the political environment is becoming increasingly favourable for both Russia and the company itself in the light of its recent partial privatisation.

    "Money managers have loaded up on the long side of the market," Tim Evans of New York-based Citi Futures Perspective said. "They are looking for higher prices and therefore their fortunes are closely linked to the rate of compliance to these production cuts."

    International oil reserves are expected to decline by 600,000 bpd in the next half-a-year, according to estimations made by the International Energy Agency (IEA). Earlier this year, the IEA had said oil stockpiles would remain stable at their current levels until late 2017.

    US oil producers commissioned 12 oilrigs in the week ending on 16 December, with the overall count increasing to 510. Although it’s at its highest since January 2016, the oilrig count is still below its 2014 highs of above 1,000. The US oil output is expected to increase from about 8.5 mln bpd in July to some 8.8 mln bpd in late December. Coupled with higher oil prices, this will bring substantial revenues to the US energy sector, hence the investor optimism. "Since its trough on May 27, 2016, producers have added 194 oil rigs (+61pc) in the US," US financial services company Goldman Sachs said.

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    Tags:
    energy sector, investment, oil, Rosneft, International Energy Agency (IEA), JPMorgan Chase, OPEC, United States, Russia
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