Oil Traders Cut Longs

The latest CFTC COT institutional positioning report shows that crude traders reduced their net long positions in oil by a further 19,047 contracts. This latest reduction takes the net position back down to 492,678 contracts, marking a six-month low in upside exposure.

The upside position in oil has been steadily unwound over recent weeks following news of the OPEC+ decision to begin scaling out of the production cuts which have been in place since last January. Given the lingering uncertainty in the outlook, the market is wary that the cuts will increase supply at a time when demand is still yet to see a proper recovery, given that global air travel is still largely nullified due to travel bans and lockdowns.

India COVID Surge Hits Oil Demand

News of a fresh surge in COVID cases and deaths in India has had a downward impact on oil prices this week. The country has been ravaged by a mutated variant of the disease which has forced large swathes of the country into lockdown. Given that India is the third largest user of oil worldwide, the demand impact has been significant and looks likely to remain in place for some time until the government can get the virus under control.

EIA Reports Surprise Inventories Build

The latest report from the Energy Information Administration this week added further selling pressure with the EIA reporting a surprise build In US crude stockpiles. The market had been looking for a 3-million barrel decline but instead, the EIA reported a 600k barrel increase. Gasoline stockpiles were also seen higher over the week, rising by 86k barrels to 235 million barrels. Distillate stockpiles, the category which includes heating oil and diesel, were lower by 1.1 million barrels.

Despite the more bearish tone to the fundamental backdrop this week, downside in oil prices has been largely offset by the continued decline in the US Dollar. However, if the greenback can start to recover in the near term, this could cause a deepening of the oil price decline.

Technical Views

WTI

The current sell-off in crude has the potential to carve out a lower high against the 2021 peak, suggesting the room for a deeper correction on a break below the 57.24 base. Below there, the rising channel low and the 54.68 structural level will be the next support area to watch. While this region holds, the bullish outlook remains intact in the near term

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