The Crude Chronicles - Episode 171

Oil Traders Increase LongsThe latest CFTC COT institutional positioning report shows that oil traders increased their net long positions again last week. Total upside exposure was increased for the second week, from 239k contracts to 249k contracts. Despite the uptick in bullish bets, oil prices have suffered recently with crude futures falling around 7% from last week’s current 2023 highs, now back in negative territory for the year.Demand Outlook WeakeningCrude prices have come under pressure recently over growing concerns for the global demand outlook. With the EIA and OPEC both cutting their demand forecasts for the year ahead, crude has been unable to capitalise on recent USD weakness. Fears of a global recession have been a main theme among central bank outlooks and US corporate outlooks at the start of the year. However, recent US data has shown a little more resilience than expected and with China having reopened its borders, there is a case for arguing that the outlook has actually improved, especially later in the year.Russian Supply IncreasesOne of the main downside factors for oil currently is the recent news that Russian oil shipments to Asia have surged in recent months. The disruption to global supply caused by the war in Ukraine and the subsequent sanctions applied against Russia was a huge driver in the oil rally seen last year. However, with data showing that lost global supply is offset by increased Russian supply to Asia, prices have been subdued.EU Price Cap ImpactThe recent implementation of EU price caps on Russian oil is also helping keep prices down. With cooperating members only allowed to deal with Russian oil cargoes at a price of $60 or less, oil prices are being held down despite recent data showing a spike in demand from Western Tankers. EU leaders are currently locked in talks to agree a new price cap on a broader set of Russian products, including diesel which trades at a higher price than crude. The new EU ban on these wider products (diesel, gasoline, jet fuel) comes into force on Sunday 5th February which is the deadline for the current talks.EIA Record Large Inventories BuildThe latest EIA report released yesterday showed a surprise increase in US commercial stores over the prior week. Stockpiles rose by 4.1 million barrels, in stark contrast to the 1 million barrel decline the market was looking for. The data is indicative of the weak demand seen in the US currently and is keeping oil prices pressured for now.Looking ahead, oil prices look subject to further losses until we start to see a shift in the current narrative. Better data out of China recently is encouraging and if this develops as a theme, oil prices should start to recover.Technical ViewsCrude OilThe recent failure at the 81.40 level has seen the crude market turning lower again. Price is now testing the 76.49 level along with the retest of the broken bear channel top. If price breaks back below this area, the outlook favours a further fall towards 70.26 next, in line with bearish momentum studies readings.