Saxo's Daily Financial Markets Quick Take
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Crude oil made a sharp U-turn on Monday with Brent and WTI finding a bid following a near 19-dollar drop since early November on continued and escalating concerns about the demand outlook in China as protests against the country’s Covid-zero strategy spread. The slowdown in demand from China will be temporary but having unsuccessfully fought Covid outbreaks with lockdowns for months, the prospect for an improvement looks month away and with the added risk of an economic slowdown reducing demand elsewhere, traders have increasingly been forced to change their short-term outlook.
Before Monday’s turnaround both Brent and WTI crude oil had seen an increased amount of technical and momentum selling from money managers, and during a three week period to November 22, the total net long was cut by 31% to 310k lots, a three-month low. Hardest hit has been Brent crude which in the week to November 22 saw money managers cut bullish bets by one-third or 71k lots to 138k lots. This the sixth biggest weekly reduction on record cut the net long to a 3-month low and second lowest of the year.
Prompting this loss of momentum and long liquidation has been a return to contango at the front end of the futures curve. The current prompt spread, being Jan23 and Feb23 traded as low as -70 cents on Monday, a level that was last seen in May 2020 during the peak pandemic scare.