Oil Traders Cut Longs 

The latest CFTC COT institutional positioning report shows that oil traders cut their net long positions last week. Bullish exposure was trimmed to 236k contracts from 244k contracts prior, putting an end to the recent run of increased upside positioning we’d seen. The recent sell off in oil has seen crude futures falling by over 20% from YTD highs, making new lows for the year yesterday, before bouncing. For now, oil prices are sitting back above the 66.97 level in a potential double bottom structure which suggests room for a further recovery higher.

Recession Fears

Crude prices have come under heavy selling pressure recently amidst an uptick in global recession fears. Weaker industrial data from China at the start of the week has raised concerns over the demand outlook in China. If the post-pandemic recovery there looks to be slowing, this will have major repercussions for global trade and the oil demand outlook.

Fed Impact 

Alongside this, US recession fears have taken centre stage once again this week. The FOMC yesterday saw the Fed hiking by a further .25% while signalling that it would move to a data dependent stance on any further rate adjustments. The market has taken this as a signal that the bank will likely remain on hold for now in line with its concern over recent market developments. Banking sector issues have returned to focus, and many expect lower growth over the year as a result.

Further EIA Drawdown Noted

The latest weekly update from the Energy Information Administration yesterday was some comfort for bulls. The EIA reported a further weekly inventories deficit of 1.3 million barrels. This was deeper than the 0.5 million-barrel draw the market was looking for and comes on the back of the prior week’s 5.3 million barrel deficit, suggesting that demand is picking up currently. However, this data was offset by a rise in gasoline stockpiles which reflected the almost 10% drop in demand for motor fuel.

Near-Term Risks

Looking ahead, there are clear downside risks for crude. Should recession fears grow in focus, particularly if the US banking crisis re-escalates, this will weigh heavily on oil. However, the prospect of a weaker USD as the Fed pivots away from tightening can help oil recover near-term. Additionally, any further action from OPEC might also help underpin prices.

Technical Views

Crude

The breakdown below the 66.97 level saw crude firmly bought into the lows. With price now back above the level and on course to print a large bullish reversal candle, the near-term focus is on a further recovery higher. While above 66.97, the next hurdle for bulls will be the 72.61 level. Should price slip back below 66.97, however, 62.50 will be the next support to note.