Oil Traders Continue to Reduce Longs
The latest CFTC COT institutional positioning report shows that oil traders continued to reduce their net-long positions last week. Upside exposure has been steadily paired back for over a month now. Despite the ongoing reductions in long positions, oil prices have seen better demand this week with crude rallying off the 95.93 level support. For now, however, prices remains capped by the 106.05 level resistance.
EIA Reports Huge Inventories Build
This week’s rally comes despite the latest release from the Energy Information Administration. The EIA reported a huge 9.4-million-barrel surplus last week. This marks a sharp advance on the prior week’s 2.4 million barrel build and was well above the 1.1 million barrel surplus the market was looking for.
Ukraine Conflict Poses Fresh Upside Risks
The main driver for oil markets continues to be the ongoing conflict in Ukraine. Higher oil prices this week are therefore likely a reflection of fears that the violence might intensify. Putin has recently reaffirmed his commitment to the war and, with a new general leading the operation, is reportedly building forces in eastern Ukraine, ready for a fresh attack. Additionally, news of a mass surrender by Ukrainian marines means that the port city of Mariupol is now close to falling under Russian control. With the war raging on and the prospect of a fresh uptick in violence, oil prices remain vulnerable to upside risks.
Longer-Run Demand Concerns
While the violence in Ukraine is keeping near-term upside risks alive, the longer run market view has shifted recently. With inflation spiralling, supply chain issues continuing to cause headaches and now with fresh lockdowns in China, there are concerns over the demand outlook for oil across the rest of the year. Healthy economic trajectory ahead of the invasion of Ukraine was driving expectations of higher oil demand across the year. However, with fears that elevated inflation globally, along with tighter monetary conditions, might impact growth, demand looks likely to be weaker than expected later in the year.
Major Oil Releases Helping Balance Market
Recent SPR releases have also helped balance the market recently. The US announced plans to release around 180 million barrels over the next six months along with the IEA adding a further 60 million barrels. Meanwhile, OPEC continues to gradually hike its output, unwinding the production cuts put in place during the height of the pandemic. With those cuts due to be paired by September, the market looks likely to be much better balanced by then.
Technical Views
Crude Oil
The rally off the 95.93 level support this week has seen the market breaking out above the recent triangle pattern. With both MACD and RSI turning higher here, the focus is on a continued push higher with 106.05 the next level to break, opening the way for a test of 114.71 next. Bears will need to see a break below 95.93 to alleviate near-term bullishness.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.