Oil Traders Cut Longs

The latest COT CFTC institutional positioning report shows that oil traders cut their net-long positions once again last week. This latest decline was well reflected in price action, with crude currently sitting down by more than 12% off the 2021 highs. Following four consecutive weeks of declines, however, we are finally starting to see some upside action this week with oil prices on course to print their first positive week in over a month.

US Dollar Rally Weighing On Oil

In terms of explaining the recent sell off in oil prices, the major driver has been the breakout in the US Dollar. With recent inflation figures sparking renewed Fed tightening expectations, the Dollar has been on a firm rally over recent weeks, weighing on oil prices and the broader commodities complex as a whole. Even a slightly lower than expected preliminary GDP print yesterday hasn’t taken the shine off the Dollar, which is currently around its highest levels since Q2 2020.

OPEC Considering Cutting Production Levels

This week specifically then, the rally in oil prices has largely been driven by reports that OPEC are considering cutting oil production in a bid to keep prices supported. The move is a response to President Biden’s tactic of releasing oil from the US SPR in a bid to combat higher prices, having called on OPEC to lift production levels. However, Biden now risks a backlash should the cartel, and allied producer states led by Russia, decide to cut back on production.

The latest report from the Energy Information Administration, released yesterday, showed that US commercial stockpiles rose by 1 million barrels last week. This increase was in stark contrast to the .5 million barrel decrease the market was looking for. While headline crude stocks rose, fuel inventories were lower again. Gasoline and distillate stockpiles fell by 600k barrels and 2 million barrels respectively. Indeed, the drop in fuel inventories came despite a surge in refining activity, reflecting overall strengthening in fuel demand.

Technical Views

Crude Oil

The reversal lower in crude prices has seen the market trading down to test the band of support between 74.46 – 76.78. For now, this area is holding as support. However, with both MACD and RSI bearish, there is risk of a further drop lower towards the rising channel support, ahead of the 69.53 level.