Oil Traders Slash Longs
The latest COT institutional positioning report from the CFTC shows that, despite the rally into last week’s highs, oil traders were dramatically reducing longs. The net long positions fell by over 100k lots, the largest one week drop since July 2021, taking the total position back down to around 435k. The reduction in upside exposure has played out over the last week, with crude prices pulling back by almost 30%.
The main driver for oil continues to be the ongoing conflict in Ukraine. While prices were recently driven to their highest levels since 2008, the last week or so has seen prices correcting lower. There are a few reasons why we have seen prices pulling back so dramatically.
Hopes For Ukraine-Russia Ceasefire
Firstly, as the conflict has dragged on, it has become clear that there will be no quick victory for Russia and, with peace talks ongoing, there are growing hopes that a ceasefire or more permanent resolution can be achieved, allowing for an end to the violence. While no such deal has ben made yet, both sides have recently expressed hopes for such a deal, creating some optimism within the market.
Co-Ordinated Global Oil Response
Secondly, the severe spike in prices since the war broke out has prompted a huge global response. The US and the IEA have been involved in massive co-ordinated releases of strategic oil reserves, while OPEC has said that it will consider accelerating the pace of its oil production increases in a bid to curtail rising prices. Additionally, the US and UK have both outlined the need to step up domestic oil production in a bid to off-set higher prices as well as dependence on Russian oil.
EIA Reports Huge Oil Surplus
The latest report from the Energy Information Administration has also helped ease the upside pressure on oil this week. The EIA reported an almost 5 million barrel surplus in commercial US crude stores last week. This was in stark contrast to the 1.9 million barrel drawdown the market was looking for.
China Demand Fears
Finally, worrying news out of China this week has weighed sharply on near-term demand outlooks. News that large parts of the country have gone back into lockdown following a resurgent outbreak of COVID has raised fears over demand there. Additionally, traders are concerned about the knock on effects for the global economy as well, perhaps, as fearing the return of such measures in other countries if we see further severe outbreaks.
Technical Views
Crude Oil
The sell off in oil has seen the market trading back down to retest the broken bull channel top and 95.93 level support. While this area continues to hold as support, the near term focus is on a further push higher with bulls looking to get back above the 106.05 level. However, should price slip below here, the 90.85 level is the next support to watch.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.