Oil Traders Increase Longs

The latest CFTC COT institutional positioning report showed that WTI traders increased their upside exposure in crude last week by 1261 contracts. This latest increase brings the total position to 472797 contracts. The latest lift in upside bets in oil appears a little disjointed with the general backdrop at the moment as concerns around the growing global second wave of the virus continue to dog the outlook.

Many European countries are now introducing fresh lockdown measures as a means of countering the fresh build in both new infections and the death toll. As yet, these new lockdown measures have been predominantly local, limiting the downside impact on economic activity and demand. However, should these local lockdowns begin to increase in number, the negative impact will not be too far off the damage caused during the first wave of the virus, which resulted in heavy loss of demand for oil.

Already we are seeing the return of travel disruption as a result of fresh lockdowns across Europe. The loss of demand from the aviation sector during the height of the pandemic was a major driver of the decline in oil prices and so headlines around travel disruptions are being closely watched by oil traders.

OPEC Cuts Demand Forecasts

In its latest global outlook released last week, OPEC revised its global demand outlook lower for this year and next. Notably, in 2021 it now sees global oil demand recovering at a slower pace than initially forecast due to the resurgence of the virus projected over the coming months which is likely to create fresh economic hardship at the start of next year.

EIA Reports Further Drawdown

In its latest weekly update, the EIA reported a fresh 1 million barrel drawdown in US oil inventories last week. While news of a further drawdown is encouraging, the declines are starting to weaken now and, accompanied by an increase in gasoline inventories, suggests that the demand environment in the US is softening. The prospect of more states returning to lockdown over the coming months is a big risk factor for oil demand and will be closely monitored.

In terms of offsetting factors for oil weakness, the renewed sell off in the US Dollar is providing some support. Uncertainty ahead of the US elections next months, as well as hopes that a fresh US stimulus package can be agreed, is dragging the Dollar lower, creating some upside support for risk assets, including oil.

Technical Views

WTI

From a technical viewpoint. Following the breakout above the bearish trend line from year to date highs, oil prices have failed to break back above the $41.35 level which remains the key upside hurdle in the near term. Above there, attention will turn to the $50.32 level next. To the downside, $35.79 remains the key level to watch.

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