Oil Traders Reduce Longs

The latest CFTC COT institutional positioning report shows that oil traders reduced their net long positions by 19, 237 contracts last week. This latest reduction takes the total position down to 430,527 and comes amidst a deterioration in the near-term outlook for the oil market as resurgent COVID fear dampen risk assets. The ongoing surge in global Delta variant case numbers is creating some uncertainty in the outlook which, after a rebound over recent months, is weighing on the oil demand outlook here.

Oil prices have had a tumultuous few weeks with price declining from recent highs around the 74.465 mark to around lows of 65.52 before rebounding. With buyers stepping back in at the latest test of the 65.52 support there is better sentiment this week, despite the latest reduction in positioning.

US Calls on OPEC To Increase Oil Prices

In terms of the fundamental backdrop, the big focus this week is on the US administration’s call for OPEC to increase its oil supply. President Biden has called on the oil producing cartel to increase its level of oil output in order to address rising oil prices. With record prices being set at the pump, Biden has shared his concerns that higher energy prices will hamper the economic recovery underway.

Currently, OPEC is undertaking a gradual increase in oil production levels. Following the stringent restrictions put in place at the start of the pandemic, OPEC has been increasing its levels of output over recent months in accordance with the increase in oil prices. Indeed, at the group’s latest meeting OPEC, along with non-OPEC allied nations led by Russia, saw some disagreement regarding output levels. While the group’s de-facto leader, Saudi Arabia, has been calling for a slow and steady increase in production levels, UAE producers have been calling for a sharper hike. With many producers in the UAE having increase their production capacity over the course of the pandemic, producers in this region have pressured OPEC to allow higher output levels. With the US now calling on OPEC to increase output also, the risks of an uptick in production levels over coming months have been raised.

EIA Reports Inventories Drawdown

The latest report from the Energy Information Administration this week offered some help for crude bulls. The EIA reported that commercial inventories were lower by 0.4 million barrels last week. While this was less than the 0.8 million barrel drawdown the market was looking for, it continues the recent theme of inventory declines, reflecting increasing US demand as re-opening continues.

Technical Views

Crude Oil

The recent downside break of the rising trend line saw price testing the 65.52 level once again. With the area holding as support, and indicators highlighting bullish divergence, there is room for price to continue higher here. However, bulls will need to see price back above the 69.53 level where price is currently retesting the broken trend line. Should we see a failure here, there are risks of a downside reversal in the near-term.