Oil Traders Reduce Longs

The latest CFTC COT institutional positioning report shows that WTI traders reduced their net long positions by 2506 contracts last week, taking the total position to 514659, bringing positioning back down from the recent four month highs. The reduction likely came on the back of the recent announcement from OPEC+ that it will begin scaling out of its current production cuts as of January. Given the still soaring rates of COVID globally, there had been an expectation that that cartel and its allies would look to extend the cuts to support oil prices over Q1 next year. However, it seems that given the general uptick in risk appetite and the optimism linked to the recent started COVID vaccinations, the cartel and its allies are now looking to capitalise on increasing oil prices.

Risk On Supporting Oil

Notably, the reduction in longs last week appears at odds with the current price action as oil prices climb to their highest levels since early March, during the height of the pandemic. With risk assets soaring into year end as traders focus on COVID vaccinations and the hopes of a return to normal next year, oil prices look geared towards further upside. With the US, UK and Canada having each begun vaccinating their citizens, the hope is that other nations will now quickly follow suit, leading to a more coordinated global effort which should help amplify the return to normal.

The main focus for oil traders is the return of air travel next year. The aviation sector, which accounts for the sector largest portion of oil demand (sector by sector) has been decimated by the lockdowns and travel restrictions in place across the year. Even now, with many countries allowing air travel again, quarantining rules have kept demand heavily subdued. A resurgence in demand for the aviation sector next year would be a strong upward catalyst for oil prices and will be carefully monitored by traders.

USD Weakness

Weakness in the US Dollar is also helping lift oil prices here. Yesterday, the Fed reaffirmed its commitment to supporting the US economy, vowing to maintain massive monthly bond purchases until substantial economic recovery is seen. The Fed also reiterated its message that rates will stay on hold until at least 2023, keeping plenty of downward pressure on the Dollar which is also being subdued by US fiscal stimulus expectations heading into the New Year.

EIA Drawdown

In its latest weekly update, the EIA had more good news for oil bulls. The group reported a weekly draw-down of more than 3 million barrels last week, outstripping expectations and offering further support for oil prices. Demand has been choppy in the US recently. However, with the focus firmly on the New Year, news of a drawdown has added to the positive market sentiment for oil traders.

Technical Views

WTI

The breakout above the bearish trend line from year to date highs is starting to gather pace now. Following the move above the 43.96 level, oil prices are now climbing back to levels not seen since Q1. While prices holds above the 43.96 level, the near term outlook remains bullish. The next hurdle for bulls will be the psychological 50 level, with big structural resistance in the region noted also at 50.32.

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