Oil Traders Cut Longs

The latest CFTC COT institutional positioning report shows that oil traders reduced their net long positions last week from roughly 246k contracts to roughly 229k contracts. This reduction comes on the back of a steady build in prior weeks and reflects a shift in sentiment in the crude market. That shift has been well reflected in price action this week with crude futures breaking down to fresh lows, heading quickly back towards the current YTD lows. Crude prices had been holding the 85.53 lows over August but have now broken firmly below, suggesting deeper downside to come.

OPEC+ Agrees Small Production Cut

The sell-off in oil prices this week came despite OPEC+ agreeing a small production cut of 100k barrels per day to take affect from next month. The group agreed the cut in a bid to help buffer falling prices, given the almost 40% drop from YTD highs. However, for now at least, the move has been unable to lift oil prices with crude futures plumbing fresh lows as I write.

Recessionary Concerns Still An Issue

The major downside catalyst for currently, is rising recessionary concerns. The oil demand outlook is suffering amidst fears of a growing global slowdown. With central banks across the G10 (BOJ excluded) pushing ahead with tightening, inflation still elevated, and the ongoing impact of the Russia-Ukraine war, fears of negative global growth later in the year are starting to weigh heavily on oil prices. Even the drop in bond yields and USD over the last 24 hours has been unable to stem the decline.

China on Watch

Among the main issues here is that of China COVID policy. On the back of several key lockdowns earlier in the year, as the government attempts to pursue zero-COVID, oil traders are highly sensitive to the risks of further such lockdowns later in the year and the impact this will have on the economy. Oil demand suffered sharply over the first few months of the year as these lockdowns took hold and fears of a similar dynamic in the coming months are adding to the bearish tone in oil markets.

EIA Update Due Today

The latest update from the EIA has been delayed this week due to the Labour Day holiday in the US. The report will now come out later today instead and is forecast to show a drawdown of 2 million barrels. However, given the bigger macro themes at play here, the data seems unlikely to fuel much upside in oil prices.

Technical Views

Crude Futures

The sell off in crude oil from the failure at 95.93 has seen the market trading heavily lower. Price is now at a key juncture, retesting the broken bear channel top from YTD highs along with the long term rising trend line. With momentum studies having flattened, if price can hold here, there is still room for a recovery higher. Below here, however, and 79.21 and 73.16 come into view very quickly.