Oil Traders Cut Longs
The latest CFTC COT institutional positioning report shows that oil traders reduced their net long positions further last week. Upside bets in oil have now been steadily reduced for a number of weeks reflecting the recent blow to risk appetite suffered as a result of news of the Omicron variant. This week, however, oil has been in higher demand with prices recovering off lows around mid 65s to trade back up into the low 70s.
Risk Sentiment Rebounds
The rebound in oil prices this week has been a function of the general recovery in risk sentiment seen across the markets. The initial knee-jerk reaction to the Omicron news, which saw risk assets heavily sold, has dissipated for now.
While the new variant appears to be more transmissible, for now at least, it also appears to be far milder in terms of symptoms. Consequently, the market is attaching a much lower risk of a return to lockdowns or widespread travel restrictions. With this in mind, risk appetite looks likely to continue to recover unless this narrative changes as a result of a shift in Omicron data.
OPEC Lifts Oil Production
Indeed, the rally in oil prices this week comes despite OPEC+ agreeing to lift oil output by 500k barrels-per-day this month, an increase on the 400k barrels-per-day quota set in January. The decision was taken, despite the uncertainty around Omicron and the recent price drops, as a means of boosting overall oil production given that some members of the group have struggled to meet quotas. The group is next due to meet on Jan. 4 to decide oil quotas for the initial months of 2022.
EIA Reports Lower Drawdown Than Expected
The latest report from the Energy Information Administration this week was unable to dent bullishness in oil prices despite a mostly bearish set of figures. The EIA reported that commercial US crude stores fell by only 0.25 million barrels last week, far less than the 1.7 million barrel decline forecast.
Meanwhile, gasoline inventories were seen higher over the week, rising by 3.9 million barrels, far above the 1.8 million barrel increase forecast. Distillate stockpiles were also higher, rising by 2.7 million barrel, again higher than the 1.6 million barrel increase forecast.
Technical Views - Crude Oil
Following the bounce off the 65.52 level support, oil prices are now fighting to get back above the broken bullish trend line. With the 74.46 level resistance above, this is a key resistance band for oil. A rejection in this area raises risks of a large head and shoulder pattern forming, pointing to risks of a deeper reversal in the medium term.
