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Oil Traders Increase Longs Again

The latest CFTC COT institutional positioning report shows that oil traders increased their net long positions last week from 181k to 226k. This marks the second consecutive weekly increase in bullish crude bets which have now risen more than 50% off the March lows. The uptick in bullish positioning has been well reflected in price action recently with crude futures seen surging around 30% off the lows.
 

OPEC Cuts

There have been a couple of big developments within the fundamental landscape for oil traders recently. The biggest of these is undoubtedly the recent, unexpected announcement from OPEC+ that it will cut oil production by a further 1.6 million barrels per day. The move has caused a seismic shift in the outlook for the oil market. Additionally, OPEC+ has signaled that further such cuts could be made, if needed, citing concern for the demand outlook this year and a need to keep prices from plunging.
 

Falling USD

Along with the production cuts from OPEC+, oil prices have also been supported recently by the shift in the market’s expectations and forecasts regarding further Fed tightening. With US inflation cooling sharply, and recent banking sector turmoil also a factor, hawkish expectations have been dialed back significantly. This has led to a heavy weakening of the US Dollar which is also helping underpin oil prices for now.
 

Downside Risks

However, there are some downside risks worth keeping an eye on. One of these is the potential for a US recession later in the year. Yesterday’s FOMC minutes revealed that a drop in growth is one of the key concerns for the Fed on the back of its recent and projected tightening. Should signs of a slowdown in growth emerge this would likely take a toll on oil prices. However, with Chinese demand recovering and OPEC+ slashing production, this issue isn’t expected to cause too much drag just yet.
 

EIA Surplus Recorded

Yesterday, the EIA reported an unexpected 0.6-million-barrel increase in US crude stores. This was in stark contrast to the 1 million barrel deficit expected and the prior week’s 3.7 million barrel deficit recorded. Gasoline stocks, meanwhile, fell 0.3 million barrels, less than the 1.6 million barrel deficit expected. Production was seen rising against last week to 12.3 mbpd from 12.2 mbpd the prior week.

Looking ahead, oil prices look likely to remain skewed to the upside against the backdrop of recent (and potential for further) OPEC production cuts. With USD forecasts skewed lower also around the Fed, the near-term environment looks supportive for crude.
 

Technical Views

Crude

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The rally in oil prices has seen crude futures breaking out above the bearish trend line from 2022 highs. Price is now testing above the 82.59 level highs. This is a key breakout zone for oil and if price can hold above here, the focus is on a test of the 85.96 level next with 93.47 sitting above as the broader target, in line with bullish momentum studies readings. 

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