Crude Caught Between Opposing Market Pressures
The CFTC COT positioning report showed that, last week, investors reduced their net long positions in WTI crude by 36,960 contracts, taking the total position to 530,312 contracts. The reduction in upside exposure was likely down to a spate of profit-taking as WTI continued to fall back following the easing of US-Iran tensions.
Sales have continued in WTI this week with the benchmark crude price falling from highs of over $59 at the start of the week to current mid $55 levels. Early in the week, oil prices had been higher in response to news of supply disruptions in Libya. It was reported on Monday that the Libyan National Army had shut down a key pipeline in the country as part of efforts to strangle oil supply to the UN-backed government. The closure of the pipeline has resulted in supply reduction of roughly 800,000 barrel per day. This reduction means Libyan output is now at its lowest levels in a decade.
While price action in oil was initially higher in response to this development, on expectations of a growing supply/demand imbalance, developments elsewhere in the world soon saw the rally reverse as reports of an outbreak of coronavirus in China fuelled demand concerns.
The SARs-like virus began in China last week and has already quickly spread across Asia infecting several hundred people and killing almost 20. There are grave fears that the spread of the virus will reach the same levels as SARs did 20 years ago, causing economic damage as well as loss of human life. The spread of SARs hit many Asian economies and stunted fuel demand and there are now concerns that a similar dynamic will play out this time. With a case already reported in the US and fears that the virus might also have reached the UK, the situation is increasingly tense and is being reflected in a weakening of risk appetite.
EIA Report Delayed
The weekly EIA inventories report is delayed this week due to Martin Luther King jr day in the US. The report will now be released today instead. Last week the EIA reported an unexpected drawdown of 2.5 million barrels. This came despite the API reporting a 1.1 million barrel increase just a day earlier. This week, the API reported a similar build of 1.57 million barrels. The market is currently projecting a 100k barrel decrease. Given the current pressure on oil prices, it would likely take a far deeper drawdown than that to stem the downside in WTI.
Technical View
From a technical viewpoint. WTI prices have continued to decline, with price having now broken below the yearly pivot at $57.30 and also VWAP which has now turned negative. Unless the test of the rising trend line from 2018 lows hold, the next objective will be a move down to complete the larger symmetry objective at $52.
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Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!