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The latest CFTC COT institutional positioning report shows that oil traders increased their net long positions last week from 205k contracts to 239k contracts. Oil prices have been relatively muted this week though are still up on the year so far having rallied more than 13% off initial 2023 lows. Looking at the bigger picture, however, the market is still down around 40% from last year’s highs and was down almost 50% at its lowest at the end of last year.
 

Muted Price Action

For now, crude prices remain very much constrained by the global economic outlook. Fresh concerns over recession risks in the US and globally have weighed on the demand outlook for oil. Similarly, the reopening of the Chinese economy has been offset by the ongoing severity of the covid situation there which, for now at least, means that demand is yet to pick up at the expected pace.
 

US Economic Concerns

In the US over the last week, we’ve heard several CEOs from major companies across the business spectrum citing their concerns for the US economy this year. Just this week we heard Tesla CEO Elon Musk warning of downside risks to the economy and growing uncertainty in the outlook. While this narrative remains in place, oil prices are likely to struggle to find higher ground.
 

EIA Reports Smaller Than Forecast Build

The latest report from the Energy Information Administration yesterday showed a smaller build in commercial inventories than expected. At 0.5 million barrels, the build was well below the 1.4 million the market was looking for and was down sharply on the prior week’s 8.4 million barrel increase. Despite this, the market remains subdued for now.
 

Upside Risks

Looking further out across the quarter, however, there are some upside risks for oil. The first is the prospect of USD weakness should the Fed pivot on rates next week. If CPI continues to fall in the coming months, USD should head lower as traders begin to move forward with expectations for an end to Fed tightening. Furthermore, as the covid situation in China balances out ( herd immunity developing) demand should start to pick up and the economy should start to reap the benefits of reopening which in turn should bolster demand for oil.
 

Technical Views

Crude Oil

(Click on image to enlarge)

The market is currently at an interesting point with the recovery of December lows seeing price breaking out above the bear channel from last year’s highs but currently stalled into a retest of the broken bullish trend line from last year’s lows. The 81.40 level is the key pivot now for oil. If the bulls can get back above here, the focus turns to 85.53 next and 92.80 as a longer run target above.

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