Recovery Rally Marches On

The CFCT COT position report showed that investors increased their net long exposure by 35% last week, with the total upside position rising to a fresh 16 week high. Long positions have been building steadily following the explosive rout seen at the end of April when the continuous futures contract dropped below $0 for the first time in history.

Oil prices have been benefiting from a broader pickup in risk appetite as investors begin moving back towards higher-yielding assets as the media and political narrative around COVID-19 shifts. With countries now starting to ease lock-downs in a bid to restart damaged economies, investors are beginning to look beyond the current state of the world and towards the potential recovery due in coming months.

For oil, the return to work which is slowly starting to take shape in the US as well as parts of Europe and the UK means increased industrial demand as well as greater demand from transport and travel services. However, the next couple of months will be incredibly fragile and there is still the potential that a second, more deadly outbreak of the virus could occur which might see lock-down measures imposed again. So for now, upside remains tentative.

One of the key areas affecting global oil demand has been the massive travel restrictions in place around the world which have decimated demand among the aviation sector, typically the second largest source of demand for crude oil by sector. With many airlines operating at incredibly reduced services and other having temporarily halted services, this is leaving a gaping hole in crude oil demand which looks likely to continue or at least the next month or so.

EIA Reports Lower-Than-Expected Inventories Build

On the plus side, the EIA reported a less-than-expected rise in US crude inventories last week. While oil stocks were higher for a fifteenth consecutive week, at 4.6 million the increase was less than the 7.9 million expected. Additionally, gasoline stores were down again last week continuing the recent trend in higher motor vehicle demand as a result of the easing lock-downs.

Technical views

WTI (Bullish above 17.10)

From a technical viewpoint. Crude prices continue to rally here following the break above the bearish trend line from earlier 2020 highs. The market is now challenging the 26.05 level which, if broken, should provide a platform for a further recovery. If we see any rebound lower from here, bulls will be looking to defend the 17.10 level to keep the near-term upside bias.

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