Oil Traders Increase Longs – Price Falls

The latest CFTC COT institutional positioning report shows that oil traders increased their net long positions again last week. Total upside exposure rose from 226k contracts to 235k contracts, marking the third consecutive weekly increase in bullish bets. Despite the increase, crude prices have fallen sharply this week, reversing lower from the 82.50 range highs.

Shifting Fed View

The main driver behind the loss of upside momentum in oil has been the shift in Fed expectations over the last week. Stronger-than-expected US earnings, mainly in the banking sector, have assuaged fears of a deeper banking crisis developing. In light of this, traders have taken the view that the Fed will likely press ahead with a further hike when it meets next month. The subsequent rise in yields is dampening sentiment in oil markets currently with pricing for a further hike in June also starting to lift.

China Worries

However, oil prices have also been hindered by fresh concerns over the demand outlook. While Chinese GDP was seen coming in above expectations, bolstering optimism over the strength of the recovery, weakness in the manufacturing sector has raised fears over an uneven recovery. Given its importance to oil demand, weakness in Chinese manufacturing is a troubling factor which traders will be monitoring closely going forward.

Fed Says Economy Stalled

The latest Beige Book release from the Fed this week has also raised concerns for oil traders. The Fed noted that economic activity in the US had broadly stalled over recent week. High inflation and higher rates had less to a loss of hiring and consumer spending with access to credit having become more difficult. Against this backdrop, traders are again focusing on potential US recession risks later in the year, this has been well reflected in the rate cuts being priced in later in 2023.

EIA Reports Large Deficit

Indeed, the slide in oil prices this week comes despite a firmly bullish EIA report yesterday. The group recorded an almost 5 million barrel decline in US commercial crude stores, down sharply from the prior week’s 0.6 million barrel surplus. However, it seems this was not enough to help lift sentiment. Looking ahead, oil prices look vulnerable to further losses while focus stays on Fed rate hike expectations and recession risks.

Technical Views

Crude

The rally in crude has stalled for now into a test of the 82.59 range highs. Price has since turned heavily lower and Is now trading back under the broken bear trend line. While under the trend line again, focus is on a continuation lower with 76.49 the next support ahead of the 72.61 level.