An Unwinding of Upside Protection
Last week, the European Union approved its 18th package of sanctions against Russia over the war in Ukraine. The newest measures included an import ban on refined products processed from Russian crude oil in third countries, which would significantly restrict diesel flows from countries such as India. However, the market’s response has been lukewarm – perhaps due to the lack of US support for these sanctions, the ineffectiveness of previous sanctions packages in curbing Russian oil flow, and the practical challenges of identifying fuel refined from Russian crude oil. The M1 Brent futures contract surged to $70.30/bbl on 18 Jul, only to encounter heavy sell-side pressure and close lower d/d at $69.23/bbl. This week, we expect oil prices to remain pressured and end the week lower between $66-69/bbl.
We focus on the following three drivers of price action this week:
- EU x US Trade War
- Net Positioning in Brent
- Technical Indicators
In macroeconomic news, we began the week commencing 21 Jul with the People’s Bank of China leaving its benchmark lending rates unchanged following a higher-than-expected Q2’25 GDP print (albeit down Q/Q). With few other major data releases this week, attention will shift to the upcoming 1 Aug deadline for US trading partners to begin paying their so-called reciprocal tariffs. The elephant in the room is the 30% tariff placed on the European Union, which is racing to negotiate a deal with Washington before the deadline. Brussels has drafted multiple contingency packages of counter‑tariffs, but is divided over whether to retaliate and has repeatedly delayed their rollout.
Meanwhile, the US has indicated that, even after any accord, it intends to target a tariff rate north of a baseline of 10%. Such duties could dent European manufacturing, slow the broader economy, and weigh on oil demand.
On the other hand, ICE COT data for the week ending 15 Jul shows a rise in net long speculative positions in Brent futures. Money managers added 17.57mb (+5.3%) w/w to their long positions, while their short-positioned counterparts removed 3.4mb (-3%). This change lifted net long positioning to 239mb, its highest level since the pre-“Liberation Day” week ending 1 Apr and up 60% y/y. By contrast, while Onyx’s timelier CTA positioning model echoed the rise in net long positioning in Brent futures in the week ending 15 Jul, net long positioning fell from -1.8k lots on 14 Jul to -5.3k lots on 17 Jul, before ticking up to -4.3k lots the next day. Moreover, Brent call options have seen de-risking this week, with the 25 delta risk reversal declining to its usual sub-zero levels, reflecting reduced volatility bets amid a calmer Middle East and the muted market reaction to the latest Russian sanctions.
Adding to the pullback in volatility, the Bollinger bands have narrowed sharply this week (see chart on the next page), illustrating the steep decline in price volatility. Such periods of compressed volatility often precede a price breakout in either direction. Aligning with this, prices have also been consolidating within a positively sloped triangle with a base at around $70/bbl (see white lines on chart). As we approach the triangle’s apex, a decisive move is likely to materialise by the end of this week. Considering the strong resistance at around $70/bbl and the recent de-risking of call options, we anticipate a downside breakout, targeting a range between $66/bbl and the triangle’s upward-sloping line near $69/bbl.
