Oil Traders Cut Longs Again

The latest CFTC COT institutional positioning report shows that crude traders cut their net long positions once again last week. Total upside exposure now sits at 232k contracts, down from 240k contracts prior. This marks the third consecutive weekly reduction in upside bets, taking the total long position down from recent highs of around 280k contracts. While crude prices are down on the month, however, this week has seen crude futures making a decent recovery bouncing off the roughly $70 lows back up to around $77.

Demand Still an Issue

Crude sentiment continues to oscillate around global recessionary fears, the USD outlook and the China reopening story. With fears of a global slowdown growing, the demand outlook for oil has dropped considerably recently. This has been well discussed by groups such as OPEC and the IEA which have both lowered their 2023 demand outlook for oil amidst the cost-of-living crisis fuelled by higher inflation and higher interest rates.

USD & Fed

The USD outlook and Fed tightening expectations have been a big part of this. With the Fed now projecting rates to stay at higher levels for longer, and the peak rate now set to exceed previous forecasts, growth forecasts will likely be further reduced. This will no doubt weigh on the demand outlook further, deflating crude sentiment yet again.

China Reopening Optimism

However, there are some bright spots in the outlook. Among these, potential reopening of the Chinese economy is the biggest factor to watch. With the Chinese government having scaled back a slew of covid restrictions recently, speculation is growing that the government will soon abandon its zero-covid policy, reopening the economy in full. Should we see further evidence supporting this view, near-term, crude prices are likely to lift on a material improvement to the crude demand outlook.

Technical Views

Crude Oil

The rally in crude futures off the lows has seen the market trading back up to retest the underside of broken support around the 76.49 level. While price holds back above here, the focus is on further upside. However, there is plenty of technical confluence offering resistance overhead with the retest of the broken bull trend line and the bear channel top coming in around the 81.40 level. Bulls will need to see a break back above this level to shift the medium-term bear view which focuses on a test of the 66.97 level next.