Oil Traders Cut Longs Again
The latest CFTC COT institutional positioning report shows that oil traders cut their net long positions for a second consecutive week last week. The total upside position was reduced to 239.7k contracts from 252k contracts prior. The reduction in upside exposure has been well reflected in price action with crude futures falling around 13% from the week’s highs and down more than 20% from the November highs. Crude prices are now back at their lowest level since December 2021, having fallen to fresh lows on the year this week.
Key Factors
There is plenty going on for oil traders. The big driver this week has been the return of recessionary fears which are weighing on the demand outlook for oil. Recent data surprises in the US have fuelled a shift in perspective with regard to the Fed’s likely course of action over the coming months. Traders now fear that while the Fed might slow the pace of its tightening, it is still some way off from pausing rate hikes. With this, growth fears have swung back into focus, seeing stocks falling this week, again hurting the demand outlook for oil.
China Reopening Optimism
Indeed, the slide in oil prices this week comes despite burgeoning optimism around the China reopening story. On the back of the protests and clashes seen over the prior week, the Chinese government this week announced a large scale easing of many covid restrictions, marking the biggest change in covid policy since the pandemic began. If the government can continue along this trajectory and markets get a greater sense that a proper reopening is coming, this should certainly help lift oil prices near-term.
Focus on FOMC Next Week
Looking ahead for oil, the key focus will be the FOMC next week and the latest US CPI reading just ahead of it. If inflation was seen higher again in November, the Fed is likely to focus on the need to keep going with rates, which is likely to pull oil prices lower still into year end. However, if inflation was seen cooling again, this should allow the Fed room to be more neutral with its tone, increasing the chances of a coming pause in Q1. With focus then likely reverting to the China reopening story, oil prices should get some lift in this scenario.
Technical Views
Crude Oil
The breakdown below the rising trend line has seen oil prices breaking through lows around the 76.49 mark. This is a key area for price and while below here, the focus is on a further push lower towards the 66.97 level next, in line with bearish momentum studies readings.
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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.