Oil Traders Cut Longs

The latest CFTC COT institutional positioning report shows that oil traders reduced their net long positions again last week. Total upside exposure was cut from 243k contracts to 224k contracts. This marks the second consecutive weekly pairing of upside bets since the COT started reporting again and throws further uncertainty over the near-term outlook for crude. The market reversed lower this week with heavy sales on Tuesday, giving back the gains of the prior week. Longer run, the market has been trading within a 72.61 – 81.40 range since early December and shows little signs of breaking the structure near-term.

China Impact

Crude prices had been higher over last week, boosted by better-than-expected data out of China. Manufacturing data was seen rising at its fastest pace in over ten years, in an encouraging sign that the post-pandemic recovery is starting to pick up pace. Consequently, the demand outlook for oil was lifted as traders eyed better demand from China. However, a lower-than-expected 2023 GDP target issued by the PBoC poured cold water on this bullish sentiment, raising fresh concerns over the outlook in China.

Powell Comments Spark USD Rally

Selling in crude intensified this week as the US Dollar saw a fresh round of buying, sparked by hawkish comments from Fed chair Powell. Speaking at the Senate banking committee on Tuesday, Powell warned that US rates might need to rise faster and further than previously thought in light of the unexpected strength in the US economy and still-elevated inflation. The comments saw USD trading firmly higher, dragging risk assets (including oil) lower consequently.

EIA Reports Inventories Drawdown

The latest report from the EIA this week was unable to help lift oil sentiment. This was the case despite the EIA reporting an almost 2 million barrel drop in headline crude inventories, breaking a 10-week run of inventory surpluses. However, the result has been attributed to a record unaccounted for crude adjustment figure which has distorted the reading. Distillate stockpiles, in contrast, rose to their highest levels in over a year.

USD the Key for Now

Looking ahead, the near-term outlook for oil looks highly geared towards USD movements. With that in mind, tomorrow’s jobs data and next week’s CPI data will be closely watched. Any fresh upside in USD on the back of these data sets should see oil extending losses. However, if either data undershoots forecasts, this might fuel some giveback in USD, allowing oil to recover.

Technical Views

Crude

The rally in crude prices failed into the latest test of the 81.40 level with price reversing heavily lower from there. The market is now testing the 76.49 level, midway in the range. Should price break below here, the 72.61 range lows will be the next support level to note.