Oil Traders Cut Longs

The latest CFTC COT institutional positioning report shows that oil traders cut their net long positions last week by a further 43,272 contracts. This takes the total position down to 448,740 contracts, the lowest upside positioning level for several months. Despite the reduction in upside bets, crude prices have been on a firm rally over the last week following the correction lower over the prior week.

It seems the more than 16% correction lower in oil did little to deter longer term players. Oil has since rallied and eclipsed last week’s highs, trading back up to $73.14, as of writing. The main driver behind the move has been the broader pick up in risk appetite. Recent investor uncertainty around resurgent COVID fears proved to be short lived and risk assets have since rebounded with vigour.

OPEC+ Support

Additionally, it appears that oil prices are still deriving support from the last-minute deal etched out at the OPEC+ meeting which concluded last week. Following disputes and delays, a deal was finally agreed upon which has seen oil production stepped up by 400k barrels per day along with restrictions remaining in place until the end of March 2022, marking an extension by a quarter. In agreeing a deal, the market has avoided a potential breakaway by UAE producers which might have seen the market flooded with oil.

Demand Outlook Improving

Away from OPEC, the big focus is still on the demand outlook for the oil market. Given the heavy hit suffered over the height of the pandemic, the outlook has been improving steadily this year, reflected in higher prices. The big question now is when the aviation sector will return in full. Concerns around COVID variants mean that the European summer tourist season is unlikely to return in full. However, news that the UK will now be removing quarantining rules for double vaxxed tourists from the US and EU has been a welcomed.

EIA Reports Further Drawdown

The EIA has good news for oil bulls this week also. The group posted a 4.1 million barrel inventories drawdown for last week, almost double the drawdown forecasted. Following an unexpected surplus result over the prior week, stockpiles are now back in drawdown, reflecting the ongoing pickup in demand.

Technical Views

Crude Oil

The rally in crude oil this week has seen price extending the move above the 69.53 level. With RSI positive now and MACD close to switching bullish, the focus remains on further upside in the near term. The big hurdle now is the 74.46 level. Bulls will need to see a clean break above the level to keep focus.