Oil Traders Cut Longs Again

The latest CFTC COT institutional positioning report shows that oil traders cut their net-long positions once again last week. Total upside bets were trimmed to 289k from 302k prior. This marks the fourth consecutive reduction in upside bets in oil which has been well reflected in the near 18% plunge in crude futures prices from recent highs. While oil prices are attempting to fight back this week, the move has been laboured and the rally has started to reverse into the back of the week.

USD Rally Weighing on Oil

Fresh strength in the US Dollar has been a major headwind for oil prices this week. With crude starting the week on a positive footing, amidst a weaker US Dollar, the rally in the greenback into the middle of the week has fuelled a sharp reversal in crude prices. With the Dollar now heading back up towards yearly highs on hawkish signals from the Fed, crude prices have come back under pressure amidst the general wave of risk aversion sweeping markets.

Recession Fears Weighing on Oil Also

In terms of the broader downturn in oil prices over recent week, global recessionary fears have played a big part. With central banks pressing ahead with aggressive tightening programs and inflation continuing to soar globally, traders are becoming increasingly fearful of recessionary risks into year end. Indeed, while Fed’s Powell sought to reassure markets this week that the US economy is strong enough to avoid a recession, his comments last week were a lot less optimistic and indicate a level of uncertainty. Moreover, with the ECB set to tighten this coming month while the impact of the Russia – Ukraine conflict rages on, there are elevated growth fears for the eurozone.

Russia-Ukraine Impact

In terms of the continued impact of the conflict in Ukraine, the big focus for oil traders is how Russia is seeking to get around EU sanctions. With reports that India and China are helping offset the loss of demand from the EU, prices have stabilised. However, if we see a shift in this picture this could lead to fresh volatility in oil prices in the near-future.

EIA Reports Large Weekly Drawdown

The latest report from the Energy Information Administration yesterday highlighted an almost 3 million barrel drawdown in US commercial crude stores last week. Oil refiners are continuing to struggle to meet rising demand in the US as the summer driving season gets underway. The drop in headline crude stores was far beyond the 500k barrel drop the market was looking for and highlights the level of demand currently being seen.

Technical Views

Crude Oil

The sell off in crude prices recently has seen the market breaking down through the rising trend line from YTD lows. Following a show of support at the 108.74 level, price is now attempting to get back above the broken trend line though, for now, it Is holding as resistance. With both MACD and RSI bearish, while the trend line holds, the focus is on further downside near term with a break of current lows the main objective for bears.