Oil Traders Cut Longs

The latest CFTC COT institutional positioning report shows that oil traders cut their long positions for a second week running last week. Total upside exposure fell to 215k contracts from around 236k contracts previously. While crude prices had been falling sharply following the reversal from April highs, prices have rebounded over the last week with crude futures bouncing off the YTD lows and now trading around 15% higher.

Shifting Fed Rates View

The driver behind the shift higher in oil prices was the pause signalled by the Fed at last week’s FOMC meeting. The Fed hiked rates by a smaller .25% while signalling that any further rate adjustments will now be data dependent. The market interpreted this as a sign of a forthcoming pause from the Fed. Indeed, market pricing now reflects rate cut expectations ahead of year end.

Crude prices were seen recovering firmly off the initial lows printed in response to the meeting, likely clearing stops and triggering fresh sell orders set below the prior yearly low. However, with crude futures now back well above that level the near-term view has shifted somewhat. A projected pause from the Fed, reinforced by yesterday’s weaker-than-forecast US CPI reading, along with the prospect of further OPEC production cuts means that oil should remain well supported near-term.

Demand Concerns

Demand is still a key issue however. Weaker data out of China this week has raised concerns over the demand outlook across the remainder of the year. With Chinese exports and imports falling again last month, fears over the factory sector are dampening oil demand expectations. Additionally, weak Chinese CPI serves as further evidence that the post-pandemic recovery is stalling. Given the recession fears in the US, oil traders are scaling back their demand expectations for the coming months which has caused crude prices to lose upward momentum this week.

EIA Inventories Surplus

The latest report from the EIA this week was also seen adding bearish pressure to crude prices. The EIA recorded a 3-million-barrel inventory surplus last week, in stark contrast the roughly 2 million barrel deficit the market was looking for.

Looking ahead, the outlook for oil prices looks heavily linked to the conversation and news-flow around recession risks. If incoming data is seen reinforcing the view that a recession is coming in the US this year, oil prices are likely to turn lower again, similarly with China. However, if recession fears fall back oil prices should have room to rise near-term.

Technical Views

Crude Futures

The rally in crude off the YTD lows has seen the market breaking back above the prior 2023 lows of 66.97. Price is currently stalled around resistance at 72.61 level, though sitting atop the level for now. While above here, the focus is on a further push higher, supported by climbing momentum studies, with 76.49 the next target for bulls.