- Crude oil hasn’t managed to gain despite strong gains in other risker asset classes
- Cyclicals are generally underperforming, suggesting concerns about global growth remain
- Bullish positioning in crude and crude-related products continues to be curtailed
It’s noticeable how liquid cyclical assets have not been able to extend the rally sparked by the soft US CPI report for October, even if too early to definitively tell whether it will last. AUD/USD has pulled back despite the release of reasonably decent Chinese economic data while crude oil is also drifting, suggesting that while concerns regarding US inflation and how the Fed may deal with it have passed, those surrounding the global economic outlook have not. Until both inflation and growth have been addressed, it’s hard to see the broader risk rally continuing given the importance of demand.
Telling that crude oil can’t rally right now
Considering there’s still a war ongoing in the Middle East, US inventories are perilously low and two of the world’s largest producers are curtailing output or exports until at least the end of the year, it’s telling crude oil cannot muster anything other than a pitiful bounce despite the risk taking evident in other asset classes.
That reflects how cool the investment community is turning towards its prospects, a view completely at odds to that seen only a couple of months ago when every single forecaster seemed to be spruiking calls for crude to hit $100 per barrel.
According to the latest Commitment of Traders report released by the US CFTC, hedge funds and real money managers went on a selling spree across the crude complex two weeks ago, offloading the equivalent of 57 million barrels in the space of seven days.
Fund managers have been sellers in five of the most recent six weeks reducing their combined position by a total of 331 million barrels since Sept. 19.
The combined position was reduced to just 349 million barrels (13th percentile for all weeks since 2013) from a high of 680 million barrels (64th percentile) six weeks earlier. Net long positioning in NYMEX and ICE WTI tumbled to just 90 million barrels, almost four-times less than the end of September.
The decline reflects concerns over downstream demand for gasoline in the United States, along with the near-term demand outlook from China given strong growth in visible inventories earlier in the year. Data on inventories over the next two days from the United States may therefore play an outsized role in determining the near-term trajectory for crude oil.
Crude oil looks heavy in the near-term
On the four hourly chart, you can see that having broken resistance last week at $77.20, the bounce following the CPI report was immediately sold into, leaving crude barely higher on the day. While it has attracted bids below $78.00 in Asia, it’s hardly a glowing endorsement that concerns over the global growth outlook have been erased by the loosening in financial conditions. It’s quite the contrary. RSI has also broken its uptrend while MACD looks like it may soon cross the signal line from above 0, adding to the sense crude is looking heavy and at risk of rolling over.
While there’s not enough in the trade here and now, a potential pullback towards $77.20 will offer optionality for traders, allow to either set longs or shorts at this level depending on whether price holds or not. A break of $77.20 may lead to a retest of support from $77.15. Further below, there’s little significant visible support below $74 until you get well into the 60s.
Should crude find its mojo again, the levels to watch above are $80.40 and $83.00.
-- Written by David Scutt