Oil Traders Cover Shorts

The latest CFTC COT institutional positioning report shows that oil traders increased their net long positions in oil last week from 227k contracts to 240k contracts. This marks the second straight week of position building in oil, bringing the total upside position higher off the recent lows around 214k contracts, mostly due to short covering. Crude futures had been lower this week, breaking down to fresh 2022 lows, ahead of an 8% reversal higher from Wednesday’s lows. Still, prices are currently down almost 10% from the monthly highs and almost 35% lower on the year overall.

US Dollar Volatility

The driver behind the reversal higher in crude yesterday was the sharp drop we saw in the US Dollar. DXY came under pressure amidst a wide-spread market rebound in response to news of the Bank of England’s unplanned bond-purchases announcement yesterday. With GBP plunging earlier in the week, markets had been rattled over growing fears for the UK economy. With risk assets rebounding in response to the BOE’s announcement, oil prices were equally lifted as USD traded lower.

While yesterday’s news has provided some temporary relief, we have yet to see how markets will trade in the medium-term. With USD seeing fresh demand today, there are fears that markets will simply return to the bearish sentiment which dominated action earlier in the week, driving oil prices lower.

Recession Fears & OPEC In Focus

Oil prices are still overshadowed by global recession fears. The latest tranche of central bank tightening in recent weeks has added to dimming economic projections into the year-end. Traders are now looking ahead to the upcoming OPEC+ meeting on October 5th. There is speculation that the group will announce further, deeper production cuts in a bid to try and revive ailing prices.

EU Negotiations on Watch

Traders are also keeping an eye on ongoing EU negotiations over a potential price-cap on Russian energy. EU leaders have been engaged in talks for months now but are still yet to find a way to agree a response which is suitable for all, given the specific reservations held by countries such as Hungary and Cyprus which have so far vetoed any proposed plans.

The reversal higher in oil prices mid-week was also helped by the latest EIA update. The group reported an unexpected drawdown in US commercial crude stores last week. While the fall, roughly 0.2 million barrels, was only minor – it marks the most that oil stocks have fallen in weeks, helping lift oil sentiment somewhat into the end of the week.

Technical Views

Crude Oil

Having broken down to fresh 2022 lows earlier this week, crude prices have since rebounded with the market moving back above the 79.21 level. However, price is still below the broken bullish trend line and, with both MACD and RSI bearish, further losses cannot be ruled out. Bulls need to see price back above the 85.53 level to alleviate near-term bearishness.