Oil Traders Cut Longs

The latest CFTC COT institutional positioning report shows that WTI traders reduced their net long positions in oil last week by 13971 contracts, taking the total position to a six week low of 511,731 contracts. this reduction likely reflects a squaring of positions into year end as well as concerns around the severity of the COVID second wave. Despite the selling last week, oil prices have surged higher this week in response to a number of themes which have created fresh demand for the commodity.

OPEC Deal Agreed

The OPEC+ meetings held this week resulted in an agreement between de-facto leader Saudi Arabia, and the rest of the group. Saudi Arabia has agreed to undertake voluntary production cuts of 1 million barrels per day provided the rest of the group keeps its production levels steady and doesn't increase. The meetings initially stalled on Monday as the group's members disagreed over how to proceed with production in February. However, talks resumed on tuesday and were eventually successful in agreeing a deal. the group shared concerns over the return of lockdowns and travel restrictions and the impact this would have on oil demand over the coming months.

EIA Drawdown Reported

WTI prices were also helped higher this week by the latest weekly update from the EIA which recorded a further 8 million barrel drawdown last week. While end of year drawdowns are somewhat typical as energy companies look to run down stocks into the year end, the news added to the bullish sentiment in oil markets nonetheless.

Near Term Risks

The big question hanging over the oil markets now is the progress of the pandemic. In the short term, the spread of the virus is intensifying with many countries recording record new-infections and deaths, leading to fresh lockdowns and social restrictions. The key now will be how quickly the vaccination programmes underway can start to show success, leading to the end of lockdowns. If this takes longer than the end of Q1, which most governments have flagged, this could start to negatively impact oil prices materially once again.

Technical Views

WTI

Oil has now broken above the $50.52 level which has been a major pivot for price since the start of 2019. If price can sustain a break of this level, bulls will now be looking to challenge the $54.68 level next, with the bearish trend line from 2018 highs coming in just above. To the downside, the next key support is back at the $43.56 level.


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