Weakening Risk Sentiment Subdues Oil Recovery

The CFTC COT report for the week through June 15th shows that the net long position saw a reduction of 21, 637 contracts, taking the total position to 546,272 contracts. This latest adjustment in WTI positioning reflects the return of fresh risk factors over recent weeks which have created obstacles for oil prices.

The rising risk of a renewed outbreak of COVID-19 has been the main hurdle for further upside in WTI prices. Several states in the US have reported a trend of steadily increasing infection rates following the lifting of stay at home measures in recent weeks. Among these, both Florida and Texas have reported their largest increases in new infections since the pandemic began. The situation echoes that being seen in China where surges in new infections have been noted in several areas since lockdown was lifted, the most recent being Beijing, which was recently quarantined again as a result of the uptick in infection rates.

Oil traders are keeping a close eye on developments within the pandemic given the devastating blow delivered to demand over recent months as a result of the social and economic restrictions put in place to curtail the spread of the virus. If oil traders sense there is a risk of such restrictions needing to be reintroduced, this is likely to translate into a return to heavy selling pressure.

Fresh Trade War Risks Emerge

The oil market has also been negatively impacted this week by the prospect of a fresh trade war amidst reports that the US is considering $3.1 billion in tariffs on goods from the UK, France, Spain and Germany. Given the current trade talks underway with both the Eurozone and the UK, such a move would create a hostile environment and runs the risk of further damaging the global economy. The oil market suffered greatly as a result of the two-year trade war between the US and China and the prospect of a fresh trade standoff has clearly unsettled oil traders this week given the selling we are seeing.

EIA Reports Further Inventories Build

Bearish sentiment in oil markets has been further increased this week by the latest update from the EIA which reported a further inventory build last week. WTI levels in the US were seen higher by 1.4 million barrels over the week, beating the consensus estimate of a 1.2 million barrel rise, taking oil inventories further into record territory.

Technical Views

WTI (Bullish above $29.14)

From a technical perspective. WTI prices were held up again at the $41.35 level this week  which continues to hold as resistance. While VWAP remain positive now,momentum studies have diverged strongly on the last ascent, flagging the growing risks of a reversal lower.  To the downside, the main support area to watch is the $29.14 level, with the monthly pivot sitting just above.

The Crude Chronicles - Episode 44

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