Trade Deal & Brexit Optimism Supporting WTI

The CFTC COT report showed that net long positions in crude increased by 67,504 contracts last. The total position in WTI crude now stands at 495,539 contracts. This latest increase in upside exposure in WTI crude reflects the optimism and relief among investors in the wake of OPEC+ announcing deeper production cuts, the news of a US-Sino trade deal and also the result of the UK general elections which have reduced Brexit risks.

In response to the ongoing increase in US crude production this year, which has seen American output consistently hitting new records, OPEC recently announced that it would be increasing the level of its production restraints. Initially running at 1.2 million bpd, the 13 nation producer-cartel along with a group of non-OPEC members headed by Russia, will now run cuts of 1.7 million bpd. The half a million bpd increase has helped underpin oil markets over recent weeks, with the upside being extended in combination with other supporting factors.

Last week, the US and China announced that the phase-one trade deal, initially for signing in mid-November, has now been confirmed. The news has put an end to the recent uncertainty which was starting to creep back into markets ahead of December 15th US tariff deadline. The deal has seen the US agreeing to reduce tariffs in return for China stepping up its agricultural purchases. Importantly, the deal now paves the way for talks to move onto a phase two deal which markets hope will see all existing tariffs removed. The news is strongly bullish for oil as the expected increase in world trade will drive a strong increase in demand for WTI crude once again.

Oil markets were also supported by news of the UK general elections results at the end of last week. With Boris Johnson’s Conservative party winning a parliamentary majority, the PM is expected to see his deal receive backing in parliament this week which will pave the way for the UK to leave the EU on January 31st, avoiding a no-deal Brexit and the subsequent economic hocks which likely would have impacted world trade and knocked oil demand lower.

The latest EIA update showed that US WTI inventories were unexpectedly higher last week, rising by 1.1 million barrels. The latest release from the group confounded earlier reports from the API which reported a drawdown in WTI levels last week. The reaction among oil traders has been positive with WTO benchmarks seeing further upside as the data adds to the positive sentiment in WTI markets heading into the end of the year.

Technical View

WTI Crude (Bullish, above $55.96) 

WTI From a technical and trade perspective. WTI continues to move further to the upside. With price continuing to rally firmly above the monthly pivot at $55.96, bias remains for continued upside, in line with longer-term VWAP remaining positive. The year-to-date highs are the next key resistance to monitor. Any correction from current levels is likely to find support as we retest the monthly R1 at $58.

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