Oil Longs Hit Ten Week Highs

The latest CFTC COT institutional positioning report shows that oil traders increased their net long positions last week by a further 26,000 contracts. This latest increased takes the net upside position back up to ten-week highs. Oil has been steadily bought over recent weeks, reflected in the ongoing rally in crude prices which has continued again this week. Oil prices have rallied a further 7% this week, extending the move off the December lows to an almost 40% rally now. Indeed, the latest push higher this week comes despite a fresh surge in USD buying and despite a bearish report from the Energy Information Administration.

Geopolitical Tensions Supporting Oil Prices

In terms of upside drivers then, the key element supporting oil prices this week is the uptick in uncertainty around Russia/Ukraine tensions. The risk of a military conflict appear to be growing, with reports that Russia is planning to invade Ukraine by early February. The US and the UK have outlined plans to send troops to Ukraine in a bid to match Russia’s military build up along the border. With tensions growing and fears of a global fallout, Chinese and US officials have been engaging this week to try and de-escalate the situation. However, with the risk of military conflict remaining at elevated levels, oil prices look set to remain supported near term with the potential for dramatic gains if conflict ensues.

EIA Reports Further Surplus Despite Strong Demand

The EIA reported a further build in US commercial crude stores last week. The group reported inventory surpluses of 2.4 million barrels, well above the 1-million-barrel surplus forecast and a sharp uptick on the prior week’s 0.5 million barrel reading. While demand remains strong, the heavy increase in production has seen the domestic market levelling off somewhat in recent weeks. Given that the winter is typically quieter, the opposite to the busy summer driving season, some uptick in stocks is to be expected. Looking at demand, however, the total products supplied number remains near all-time highs (the reading used as a gauge for overall demand), which is encouraging for bulls.

Technical Views

Crude

For now, crude prices continue to track higher within the broad bull channel. Price recently retested the 83.75 level, which held as support, and with both MACD and RSI bullish, the focus is on a continuation higher towards the 90.85 level next and the channel top above. Worth noting bearish divergence creeping in on momentum indicators here which is something to monitor as we continue higher here.