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Oil Traders Increase Longs as Price Slides

The latest CFTC COT institutional positioning report shows that oil traders increased their net long positions again last week. Total upside exposure rose to around 244k contracts from around 235k contracts a week prior, marking the fourth consecutive week of increased bullish positioning. This also marks the longest run of consecutive weekly growth in upside bets since late 2021. Despite the uptick in long positions, however, crude prices have been firmly lower over the last week with crude futures having shed more than 11% from the April highs.
 

US Economic Risks

The main issue weighing on oil prices currently is the return of recession fears. Many central banks have recently cut their growth forecasts for the year ahead as a result of the higher inflation and higher interest rates facing consumers and businesses. In the US, data weakness in recent weeks has put a sharper focus on these risks, and, with the Fed still expected to push ahead with a further rate hike next week, growth fears are mounting further.

The recent banking sector crisis in the US also poses big risks for the US economy. While markets were seen stabilizing after the initial fallout following the collapse of SVB, a fresh plunge in FRC shares this week has raised the prospect of the crisis taking another leg lower. With risks of huge contagion should FRC fail, as well as the downside risks linked to a state bailout, traders are highly cautious over the near-term outlook. Against this backdrop, oil prices have been sliding sharply.
 

EIA Reports Large Inventories Draw

Indeed, the fall this week comes despite the EIA yesterday reporting a larger-than-expected draw in commercial crude stores last week. Headline crude stores were seen falling by more than 5 million barrels last week, much deeper than the roughly 1-million-barrel deficit projected. Additionally, gasoline stocks were also seen falling, reflecting an uptick in demand. Stocks fell by 2.4 million barrels, again, far deeper than the 900k barrel deficit projected. Distillate stockpiles were also seen lower, making the report firmly bullish.
 

Near-term Risks

Looking ahead, the move lower in oil prices suggests the unwinding of a lot of speculative demand which likely joined the market following the OPEC announcement. The FOMC next week poses the main risk to oil prices with a further US rate hike likely to keep pressure on near-term. However, with OPEC willing to cut further if necessary and the prospect of the Fed taking a less hawkish outlook next week, we could start to see some price recovery following the meeting.
 

Technical Views

Crude

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The latest test of the 82.59 level has seen oil prices falling back sharply with crude futures now trading back within the bear channel and back under the 76.49 level. With momentum studies bearish, the focus is on a further push lower near term with 72.61 the next big support to watch. 

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