oil daily chart

I think I understand what happened to the oil market in the past few weeks. It was blown out much worse than other financial instruments in the banking turmoil, even in commodity terms. As I noted at the time, you would have expected economically-sensitive copper to perform similarly to oil but instead it's up near the top of its recent range.

So what happened with Oil and what's next?

1) Oil is certainly macro-sensitive and the kneejerk to trouble in the economy is to sell it. That was the first wave of selling.

2) Technicals. The $72-$82 range in oil was well defined so when it broke, technical sellers piled in. That continued on the break of $70, which was the December low and another zone of support. As those gave way, the bottom fell out.

3) Specs. There had been a steady buildup in oil longs since the bottom in 2020 and as it was one of the best trades in 2022, it grew crowded. As it broke down, it was flushed out and options action may have exacerbated it. In addition, companies may have waited too long to put on hedges and were left scrambling to sell into a falling market.

Here's the chart of CFTC positioning data and Rory Johnson at Commodity Context notes that it was the largest two-week percentage point move in net spec positioning on record.

Oil specs

Where from here?

There's some good news here for oil bulls. The drop in prices will undoubtedly make oil companies more capital-restrained and the lack of lending will keep that industry capital starved. If the banking issues fade and the global economy doesn't fall into recession, then the market will grow tight in H2. Remember that Russia has only just began curbing output by 500k bpd and the US is just wrapping up SPR sales. Moreover, the Chinese market continues to come back with flights both there and in the rest of the world picking up.

My sense of today's $3 bounce is that commodity bulls have been waiting in the wings and looking for an opportunity to buy and this may be it. Technically, a close above $72.27 would put it back into the range and set up a similar kind of technical outcome to bitcoin over the past month, as it broke down only to reverse and bust the upside.