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Oil Traders Cut Longs

The latest CFTC COT institutional positioning report, the first to be released since January 27, saw oil traders pairing back their upside exposure. Net longs were reduced from 249k to 243k contracts. The muted movement in positioning has been well reflected in the muted price action we’ve seen in crude recently with the market remaining well within the range which has framed price action since November last year.
 

Better China Data Lifts Demand Outlook

Crude prices have been a little firmer this week on the back of better data out of China. The latest China manufacturing PMI came in well above expectations, marking a return to growth for the sector for the first time since the pandemic began as well as the biggest monthly increase in over a decade. With the Chinese recovery starting to gather pace on the back of the country reopening its borders earlier this year, the demand outlook for oil is improving considerably. This is certainly helping drive bullish sentiment.
 

Russia To Cut Output Further

Oil prices were also helped by news that Russia is to further cut exports in retaliation to western sanctions. News desks reported on leaked plans to cut output by a further 25%, surpassing the nation’s previous announcement that it would slash output by 500k barrels per day as of this month.
 

Weak US Demand

However, despite better demand in China, weaker demand in the US is having an offsetting impact. Furthermore, a stronger US Dollar and higher global yields are also weighing on demand for oil, keeping prices hemmed in within the current range. Additionally, the industrial picture in the US is not as strong as hoped. The latest ISM manufacturing PMI received this week showed a fourth monthly decline, painting a worrying picture of factory activity in the US.
 

Fresh EIA Inventories Build

The latest report from the Energy Information Administration this week revealed a further build in US commercial crude stores. Inventories rose by 1.2 million barrels last week. Though slightly under the 1.7 million barrel surplus the market was looking for, the data marks the latest in a string of inventory increases that reflect the weaker demand backdrop in the US currently. Looking ahead, while the demand environment remains weak and with USD stronger, crude is likely to remain within range with only a shift in this narrative likely to provide a topside move. 
 

Technical Views

Crude

(Click on image to enlarge)

For now, crude prices continue to range between the 72.61 level support and 81.40 resistance. With momentum studies flat, the market is very much in equilibrium here with equal risks of a move in either direction. Should we break higher, the retest of the broken bull trend line and the 85.53 level will be the next resistance to note. 

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