Oil Traders Increase Long Positions

The CFTC COT institutional positioning report showed that net oil longs were increased by 4434 contracts last week, taking the total position to 539, 751 contracts. The increase in upside bets reflects the better risk environment over recent weeks with equities markets continuing to rally despite fears over a fresh increase in infection rates and deaths in the US.  New cases of the virus have been surging higher across nearly all US states with president Trump announcing this week that the virus is likely to “get worse before it gets better”.

Despite the president’s warning, highlighting the severity of the situation, the risk backdrop has remained buoyant with investors seemingly looking beyond the rise as the risk of a nationwide lockdown appears to be minimized. However, with deaths having now risen back above 1000 a day, there are fears that if deaths rise back to where they were during the height of the pandemic (2000+ a day) this could change, which would create firm downside pressure on risk assets including oil

Talk of Potential OPEC Production Cut Extension

With most nations moving firmly out of lockdown, the demand outlook for oil has improved markedly. Global trade has been increasing again and manufacturing activity has been improving broadly, suggesting that oil prices are likely to continue to increase. However, the risks of a second wave and a return to lockdown present strong downside risks. OPEC is reportedly considering an extension of its current production cuts, due to expire this month, through to the end of 2021 and potentially through to the end of 2022. The move is being driven by Saudi Arabia but so far, views on such an extension appear to be split and as yet, the market is not deriving any support from these headlines suggesting that expectations are not high in the short term.

EIA Reports Further Inventories Build

The latest weekly update from the Energy Information Administration has raised questions over the health of the recovery in the US with inventories seen rising by nearly 5 million barrels last week. Gasoline demand was also week with inventories falling by less than projected. Despite many parts of the US having been out of lockdown for a month or more, inventories have yet to confirm a bearish trend suggesting that the pickup in activity has not been a much as expected. This poses firm downside risks for oil prices is talks of fresh lockdowns emerge, putting the focus back on storage capacity concerns in the US.

Technical Views

WTI (Bullish above $41.29)

From a technical viewpoint. WTI prices have traded back above $41.29 level this week though upside momentum has weakened greatly. Momentum studies are showing clear bearish divergence and while price is well above the 50dma for now, the risks of a move back down to $29.14 cannot be ruled. While price holds above $41.29 however, the near-term bias remains bullish with the $50.32 level the next upside target for bulls.

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