Oil Price Fundamental Daily Forecast – Bullish Bias Has Evaporated on Heightened Recession Risk

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Thursday as investors brace for a large rate hike from the Federal Reserve on July 27 that could trigger a recession and a drop in demand. This news is outweighing worries over tight supply.

At 09:26 GMT, September WTI crude oil futures are trading $91.30, down $2.53 or -2.70% and September Brent crude oil is at $97.33, down $2.24 or -2.25%. On Wednesday, the United States Oil Fund ETF (USO) settled at $73.15, up $0.34 or +0.47%.

Factors Driving Current Selling Pressure

For months, crude oil was supported by the notion that sanctions against Russian energy products and supply disruptions in Libya would be enough to prop up oil prices above the psychological $100 level. However, conditions changed the last two weeks with bullish traders expressing concerns over lower demand due to increasing recession fears and lingering worries over Chinese curbs against the spread of COVID-19.

Longs Aggressively Shedding Bullish Positions

Although the market hasn’t flipped to the bearish side with aggressive short-covering, last Friday’s Commodity Futures Trading Commission’s (CFTC) Commitment of Traders report shows that longs have been aggressively dumping bullish positions.

According to John Kemp at Reuters, “Investors dumped petroleum-related derivatives last week at one of the fastest rates of the pandemic era as recession fears intensified.”

“Hedge funds and other money managers sold the equivalent of 110 million barrels in the six most important petroleum-related futures and options contracts in the week to July 5.”

“Fund managers have now sold a total of 201 million barrels in the past four weeks, according to position records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

“Most of the adjustment last week came in from the liquidation of previous bullish long positions (-71 million barrels) rather than the creation of new bearish short ones (+39 million).

“The hedge fund sector’s bullish bias has evaporated with long positions outnumbering short ones by a ratio of 3.82:1 down from 6.68:1 as recently as four weeks ago.”

Short-Term Outlook

Early Thursday, the price action suggests investors are still liquidating bullish long positions. The question many are asking is: “When will the hedge funds start shorting crude oil more aggressively?” Will they wait for actual signs of a recession? Or will they anticipate a recession with the next Fed rate hike on July 27?”

Technically speaking, trader reaction to the retracement zone at $93.16 to $86.42 should determine if September Brent crude oil turns bearish, while the key area to watch for September WTI crude oil is $89.54 to $82.80.

The key catalyst that many feel could spark a recession is a possible Fed rate hike of 100 basis points on July 27. At this time, the financial markets are pricing in a 75% basis point rate hike, but the odds of a full rate hike jumped 80% on Wednesday.

Crude oil traders face a difficult decision because so far there hasn’t been any clear evidence of a recession. So shorting crude oil in anticipation of a recession while supply is tight could prove to be a risky proposition.