Oil Traders Rebuild Longs

The latest CFTC COT institutional report shows that oil traders increased their net long positions last week by almost 20,000 contracts. This latest increase reflects the better sentiment taking hold in oil markets over the start of 2022 as prices continue to rebound off the December 2021 lows. Prices are now up by around 30% from those lows, with the market fast approaching a test of the 2021 highs. A combination of factors are leading oil higher here, including a better COVID outlook (fading omicron risks) and a weaker US Dollar.

Omicron Risks Fading

On the COVID front, the passing of omicron risks has been a major lift for oil prices and risk markets in general. With the UK and US having avoided returning to full lockdown, as with many European and Asian countries also, the market has avoided a worst-case scenario in Q1. Additionally, the scrapping of travel restrictions in some countries (re-opening of borders, scaling back of COVID measures) has seen a huge surge in airline bookings, reigniting fuel demand from the aviation sector. Looking ahead, with many hopeful that omicron will represent the final stages of the pandemic, the outlook favours increased demand for oil as global travel picks up this year.

Dollar Falling

On the Dollar front, the slump in USD over recent weeks has been highly beneficial for oil prices. On the face of it, the USD rally seems somewhat counter-intuitive given the hawkishness we’ve heard from the Fed and the strong data we’ve seen, fuelling hawkish market expectations. However, it seems the market has likely become carried away in terms of its hawkish expectations towards the Fed. With this in mind, the barrier for further USD rallying has been lifted and we are likely seeing some clearing out in positioning currently while prices and expectations realign.

EIA Reports Further Crude Draw

Finally, the EIA had further good news for crude bulls this week. The EIA reported that commercial US crude stores fell by almost 5 million barrels last week, a far deeper drawdown than the 2.1 million barrel decline forecast. This latest report again reflects the strengthening demand for oil, keeping prices supported near term.

Technical Views

Crude Oil

The rally in oil prices off the December lows has seen the market breaking firmly back into the bullish channel, taking out several key levels along the way. Price is now fast approaching a test of the 83.75 level and, with both MACD and RSI bullish here, the focus is on a break of this level and a continuation towards the 90.85 level next. To the downside, key support sits at the 78.49 level, with the bull channel low sitting just beneath.