Oil Traders Increase Longs
The latest CFTC COT institutional positioning report shows that oil traders increased their net-long positions last week for first time in a month. Overall upside bets were increased to 271k contracts from 268k contracts previously. While the move does little to rebalance the massive reduction in upside exposure seen over recent months, it is important nonetheless and might signal a near-term turning point for oil prices if bulls continue to add to upside positions this week.
Weaker USD Helping Oil Prices
Recent price action has reflected this pause in downward positioning momentum. Crude prices have been stalled along the 95.93 level support. The pullback in the US Dollar over recent weeks has been a big help for oil bulls. Ahead of the FOMC, some pushback against the idea of a larger 1% rate hike helped soften the Dollar, allowing commodities prices (oil included) some room to breathe.
More Neutral Tone at FOMC
This USD weakness has persisted this week, helped by yesterday’s FOMC meeting. The Fed stuck to the previously signalled .75% hike and sounded less hawkish in its forward guidance. Fed chairman Powell noted that inflation was still well above target but said that rates were now broadly around the area the bank would consider neutral. Powell acknowledged too that economic activity in the US is slowing though reassured markets that the US is not yet in recession.
Powell’s comments appeared to leave plenty of room for Fed action in either direction. Given slowing economic activity, some have interpreted the comments as a sign that the Fed will begin slowing down the pace of further hikes this year. However, Powell himself warned that inflation doesn’t moderate in coming months, the Fed stands to ready to do more, including further “unusually large” hikes if necessary.
Recession Fears Weighing on Oil Sentiment
Consequently, the outlook for oil prices is not clear. Fears of a recession and higher US rates are clearly negative for oil demand. However, if the Fed is right in its optimism and the US economy can avoid a recession and if rate hikes do begin to slow with a moderation in inflation, this would allow oil prices room to rebound. Alternatively, if a recession does materialise or if the Fed is seen having to continue hiking above the neutral rate to battle inflation, this will no doubt weigh on oil prices.
EIA Reports Large Drawdown
The latest report from the Energy Information Administration this week had good news for crude bulls. The EIA reported a massive 4.5 million barrel drawdown, three times the size of the expected decline in inventories, reflecting better demand last week. Additionally, gasoline stores were also seen falling by over 3 million barrels, assuaging market concerns on the back of a large surplus the prior week.
Technical Views
Crude Oil
The sell-off in crude oil over recent months has seen the market trading lower within a well-defined bear channel. The decline has recently stalled along the 95.93 level support and, with both MACD and RSI turning higher, there is potential for a reversal higher if bulls can get above the 103.80 level near-term. To the downside, a break of the 95.93 level will open the way for a test of 83.75.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.