As tension escalated in the Middle East following tanker attacks by Yemen's Iran-aligned Houthi movement, drone attacks on several Russian refineries added to the picture, and the market repriced higher on heightened concern over supply disruption.
Alongside this, developments on the U.S. side also pushed prices upward. U.S. inflation data eased, and the latest crude inventory report showed a draw of roughly 9.2 million barrels, exceeding expectations — accelerating the unwind of speculative positioning. Supply-side concern (the Red Sea, Russia) and improving supply-demand fundamentals (U.S. inflation, inventories) — two factors sitting on fundamentally different axes — happened to converge on the upside within the same month.
When two supporting factors — concern over Red Sea shipping safety and solid U.S. fundamentals — are present at once, the floor can remain supported even if one factor recedes, so long as the other persists. This dual support structure appears to be what is underpinning the firmness of the current bottom.
An increase in speculative longs can stem from two distinct sources. One is a buy-back that unwinds existing shorts for risk-aversion purposes, which does not necessarily signal a bullish shift in market view. The other is the construction of fresh longs based on a new bullish conviction, which does suggest a genuine change in participants' outlook. Distinguishing between these two within the same headline "increase in longs" is a useful way to judge how durable a rally is likely to be.
January's CFTC data shows that managed money, which had remained largely in a wait-and-see posture since last November, moved to buy back positions as it turned wary of Red Sea shipping safety. Most of this long increase was risk-aversion covering, but a portion consisted of fresh longs, likely drawing on stronger-than-expected U.S. economic growth and a sense of value at current price levels. The Number of Traders also shows buyers increasing and sellers decreasing around an average level of $72.5, confirming directional alignment among speculators at that price point.
That most of the buy-back was risk-aversion driven suggests this rally does not necessarily signal a shift into a genuinely bullish market. That said, the coexistence of some fresh long construction with a rising Number of Traders at a specific level suggests dip-buying appetite may be starting to broaden beyond a simple short-squeeze.
Around January 16th, as tankers began avoiding the Red Sea route, futures spreads strengthened their backwardation tendency. The decline that had continued since last September has paused, and the market has entered a phase of confirming a bottom.
At the same time, the level of the forward curve itself remains neutral, showing neither heightened tension nor easing. The change in shape — a shift toward backwardation — and the neutrality of the curve's level need to be treated as separate axes.
Looking only at the shape change might suggest geopolitical risk is being priced in aggressively, but the fact that the level itself remains neutral suggests the market has not yet come to treat this risk as a permanent structural shift. The $70–80 range is likely to continue functioning as the appropriate range for now.
January 2024's WTI market is confirming a bottom in the $70–80 range, underpinned by a dual support structure of Red Sea supply concern and improving U.S. economic data. While the speculative buy-back has been primarily risk-aversion driven, a portion of fresh long construction and a rising Number of Traders at a specific level suggest the rally may be gaining some breadth. The forward curve has strengthened its backwardation shape while its level remains neutral — whether this dual support structure holds is likely to be the key to reading the next phase.