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The latest CFTC COT institutional positioning report shows that crude traders increased their net long positions by around 10k contracts last week. Total upside exposure now sits at 248k contracts, up from 238k contracts the prior week. Any recent longs will likely be struggling, however, on the back of the more than 10% slide we’ve seen in crude prices over the first trading week of 2023. Crude prices are now threatening to test the 2022 lows printed over early December as the selling continues on Thursday.
 

China Covid Crisis

Far from greenlighting a fresh wave of demand, the Chinese government’s recent abandoning of its zero-covid policy has proven to be a double-edged sword. With infection rates and the death toll surging across China, crude prices have come under pressure as traders fear major disruption to industrial activity as well as consumer demand.

The latest Chinese manufacturing data this week serves as evidence of the downturn in China. The factory sector was seen falling further into negative territory with the index printing 49 from 49.4 prior. With fears mounting over the global impact of this fresh China covid wave, oil sentiment has weakened sharply. The WHO has this week warned that the lead variant in China is now the most transmissible seen so far and has put global governments on alert.
 

Global Recession Fears

Indeed, the news out of China is underscoring fears of a global recession amidst continued Fed tightening and still-excessive inflation.  Data released yesterday showed US manufacturing contracting further last month, falling to 48.4 from 49. Additionally, the FOMC minutes reaffirmed the Fed’s commitment to further tightening this year, creating additional headwinds for oil traders.
 

Downside Risks for Oil

Looking ahead, the near-term outlook for oil is fraught with downside risks. News out of China is likely to get worse before it gets better, and with increased risks of downside covid news in Europe and the US, sentiment is likely to remain weak keeping the focus on a test of the December lows in crude futures.
 

Technical Views

Crude Futures

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The failure at the 81.40 level, where the retest of the broken bull trend line as well as recent structural highs, has seen crude prices turning sharply lower. Price has now fallen back under the 76.49 level and is fast approaching a test of the 2022 lows of around 70.26. With momentum studies turning bearish here, the focus remains on the further downside for now. 

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