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OPEC move in with hedge funds to make 2017 oil's most bullish year

Net-long position on WTI and Brent crude hits record level. Shale drilling growth slows, while futures surpass $60

By Carlos Caminada and Catherine Traywick

Petroleumworld 02 01 1

For Mexico's currency, 2017 was a tale of two halves. After rebounding from a Trump-sized crater through July, the peso slumped -- although not quite enough to erase what turned out to be its first annual gain in five years. More Nafta jitters and a presidential election mean next year might be just as volatile.

The fate of Nafta , covering $1 trillion of trade between the U.S., Canada and Mexico, have weighed on the peso since Donald Trump took office. And July brings an election in which leftist candidate Andres Manuel Lopez Obrador looks likely to unseat Mexico's scandal-ridden ruling PRI party.

"A lot of the peso's gain was a correction of the over-pessimism in the past," said Danny Fang, an analyst at BBVA in New York. "For the first quarter of 2018, we can expect the MXN to remain sensitive to new rounds of political noise, with the electoral process and Nafta negotiations being the main drivers."

The peso sank nearly 14 percent immediately after the November 2016 victory by Trump, who threatened during his campaign to pull out of the trade pact. But then it quickly climbed, posting the best performance among emerging market currencies tracked by Bloomberg in the first quarter. Though the rally faltered by mid-year, the peso still ended 2017 up 5.4 percent, lagging only the Chilean peso's 8.9 percent gain among Latin American currencies. An increasingly hawkish central bank could help push the peso higher next year.

Yet investors remain wary. Yield spreads between local and hard-currency bonds are at a six-year high as investors hedge against currency risk. As pressure builds ahead of the election, it remains to be seen whether the currency can repeat the performance next year.

While the threat of too much shale production still looms, producers ended the year a lot less gung-ho than they started. Under pressure from investors to focus on profits over growth, explorers have slowed down on drilling with the U.S. rig count stalling in December.

“The expectation is that the rebalance will continue,” Gene McGillian, a market research manager at Tradition Energy in Stamford, Connecticut, said by telephone. “We've approached an area where we really need to see a steady diet of positive information.”

The optimism wasn't so widespread earlier in 2017. Concern that OPEC's efforts weren't enough and would end abruptly in March 2018 led short-sellers to dominate the scene for several months, with WTI plunging to the low-$40s in June.

"It really wasn't until the fourth quarter that we saw a resounding faith in the recovery," Stratas Advisors' Petersen said.

Global events also swung the market up and down along the way, such as Hurricane Harvey, supply disruptions in Libya and Kurdistan, a pipeline shutdown in the North Sea, and last but not least, a brutal cold snap in the final week of 2017 that drove up demand for heating oil, fuel oil and natural gas.

One of the most remarkable shifts that occurred in 2017, if a very technical one, was the change in the futures curve -- first for Brent and more recently for WTI. Contracts for nearby delivery are trading at a premium to longer-dated ones as demand rises and supplies tighten. This pattern, known as backwardation, hadn't been seen so consistently since 2014.

Hedge funds boosted their Brent net-long position -- the difference between bets on a rally and wagers on a decline -- to an all-time high on Dec. 12 and have kept it near that level.

The net-long position on WTI increased 7.3 percent to 411,972 futures and options during the week ended Dec. 26, according to data from the U.S. Commodity Futures Trading Commission on Friday. That was close to a record set in February. Longs rose by 5.3 percent and shorts fell by 11 percent.

The net-short position of swap dealers, an indication of hedging , increased for the 11th straight week to a fresh record, according to the CFTC data.

In the fuel market, money managers increase their net-long position on benchmark U.S. gasoline by about 10 percent. Meanwhile, the net-bullish position on diesel rose by 26 percent to a record as the cold snap boosted heating demand.

Story by Carlos Caminada and Catherine Traywick from Bloomberg.

bloomberg.com/ 12 29 2017

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