OPEC Cuts Aren't Cutting It

The United States Oil Fund LP (ETF) USO is up roughly 2 percent this week after Saudi Arabia energy minister Khalid al-Falih and Russia energy minister Alexander Novak said they would be on board with an OPEC plan to extend November’s crude oil production cuts by nine months.

Muted Reaction Comparatively

The bullish market reaction to the news was relatively muted compared to the huge surge in oil stocks following news of the original production cut deal in November. The global oil supply glut hasn't been eliminated as quickly as oil investors or OPEC had hoped following recent production cuts, as non-OPEC producers, such as the U.S., have increased production in recent months.

Related Link: Technical Breakdown: Watch For A Bottom In Crude Oil & XOP

WTI crude oil prices surged from under $45/bbl in mid-November to as high as $55/bbl by year’s end following the original OPEC deal. However, oil prices stalled in the low $50s, and an enduring supply glut sent them plummeting back down below $45 this month. While prices have bounced on the news of a production cut extension, WTI still hasn’t made it back above $50 as investors have grown skeptical of OPEC’s control over the market.

Hedge Fund Perspective

Hedge funds recently cut their net long bets on crude oil to their lowest levels since November. The long/short ratio for hedge funds has plummeted from 6:1 to around 3:1 in that time.

In the last six months, WTI crude is up just 1.3 percent.

Still, some analysts believe OPEC may have more ammunition in the fight to get oil prices back to the $60/bbl range.

“I wouldn’t be surprised if they’re working on a deeper cut,” Citi analyst Ed Morse said this week. Citi estimates there is a 60 to 70 percent chance OPEC will opt to up its production cuts at its May 25 meeting.