Oil Traders Cut Longs Again

The latest CFTC COT institutional positioning report shows that oil traders reduced their net long positions last week from around 229k contracts to roughly 214k contracts. The net-long position in oil has been steadily worked back from its mid-August highs around the 246k contract mark with the shift in sentiment broadly reflected in oil price moves over that period. Crude oil futures have rebounded some over the last week but are still sitting around 10% of the August highs following a sharp drop from around $97 to the $81 area.

Recession Fears Lingering

The outlook for oil prices continues to jump around, linked to investor sentiment regarding the risks of a global slowdown. With inflation still at elevated levels globally and central banks still pushing ahead with aggressive tightening programs, the outlook over the remainder of the year is skewed towards recession risks. In light of this, the demand outlook for oil has been reduced and is weighing on near-term prices.

IEA Forecasts Demand Slowdown

In its latest Short Term Energy Market Outlook released this week, the IEA noted that it expected oil demand to slow heavily in Q4 as a faltering Chinese economy begins to create a drag on consumption. China has suffered greatly this as a result of continued lockdown measures in places across parts of the country at different times.

However, the IEA did note that excessive gas prices mean that more consumers and businesses will be forced to switch to oil this winter, which should help prop up demand and offset some of the losses from other sectors. Looking further out, the IEA forecasts the oil demand outlook to recover firmly in 2023 owing to a recovery in China.

EIA Reports Crude Build, Gasoline Drawdown

The latest weekly update from the EIA added to the picture of falling demand. US crude reserves were seen growing by 2.4 million barrels last week, above forecasts for a 1.9 million barrel rise. However, gasoline stocks were seen lower by 1.8 million barrels are now sitting around 6% below their 5-year seasonal average.

Technical Views

Crude Oil

The rally off the latest test of the long-term bearish trend line in oil prices has seen the market moving back above the prior 2022 lows, broken last week. While back above the 85.53 level, there is room for a continued recovery towards the 95.93 level next, in line with tentatively bullish momentum studies readings.